KNOW YOUR RIGHTS: LOWER DEDUCTION OR NO DEDUCTION OF TAX

Lower Deduction Or No deduction Of Tax On Payments To Non-Residents

Setting Context:

Non-resident is at disadvantage when he sells his properties in India as compared to residents as they are subject to deduction of income tax at the rate more than 20% on the gross sale price of the property while it is 1% in case of residents. In this paper, we shall discuss how this disadvantage can be converted into advantage.

Available Relief

Indian Income Tax Act provides at least two mechanism whereby, the non-residents can pay tax only if the income is arising out of the transaction or tax which is actually payable on the INCOME (Capital Gains) if arising on the transaction. Non-Resident can even take advantage of tax treaty at this stage only.

First Method

In the first mechanism, the buyer can approach the tax authorities and get the certificate determining the amount on which he is obliged to deduct income tax thereby allowing a deduction of all cost of property even after indexation. This mechanism is quite simple and most appropriate where the non-resident either not available in India or find it difficult to deal which tax officers in India. As per this mechanism, following steps are necessary:

• The Buyer can apply in Form 15E under Rule -29BA and Section-195(2) of the Income Tax Act on online portal.
• On the basis of the above application the tax officer shall determine the appropriate proportion of the sum payable to non-resident on which income tax is required to be deducted under the provision of Income Tax Act read with relevant DTAAs on which tax has to be deducted under Section-195(1) of the Income Tax Act.
• The tax officer, after considering certain point, issue a certificate for that particular transaction and the non-residents named therein for a specific period specifying the appropriate proportion of the sum payable to non-resident on which income tax is required to be deducted under the provision of Income Tax Act read with relevant DTAAs on which tax has to be deducted under Section-195(1) of the Income Tax Act by the buyer.
• If the transaction could not be executed within the specified period of time mentioned in the certificate, he can apply again for the certificate.
  

Second Method

In the second mechanism, the Non-resident seller can approach to the tax authorities and get the certificate of lower deduction or no deduction of income tax on the transaction after submitting all cost related documents. Normally, non-residents who do have some connections/other income and filing tax returns in India will go this way as the tax officers may see certain additional documents and past history of the non-residents. As per this steps, the following steps are necessary:

• The Non-resident seller can apply in Form 13 under Rule-28 and under Section-197 of the Income tax Act on online portal.
• On the basis of the above application the tax officer shall determine the tax liability of the non-resident arising from that transaction under the provision of Income Tax Act read with relevant DTAAs and accordingly determine the rate of income tax at which tax has to be deducted under Section-195(1) of the Income Tax Act. If no income shall arise from that transaction, he can issue NIL rate certificate.
• Based on this certificate, the buyer shall deduct tax accordingly, obviously after considering all cost and relief if available to the non-resident under relevant DTAAs.
  

Concluding Remarks

Therefore these mechanisms provide great relief to both buyer and non-resident seller. On the one hand, the buyer has discharged his obligation and probable tax liability which may otherwise be his liability as representative assesse under Section-163 of the Income tax Act. On the other hand, the non-resident will not have to block his huge funds to be claimed refund of tax after filing his tax return in India.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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