Income Tax Return filing for NRIs

Budget 2020 proposes amending section 115A of the Income Tax Act.The Finance Minister has introduced major changes to the existing provisions of the Income Tax Act, 1961 (the Act), to promote foreign investment into India

Significant proposals TO BOOST NRI’s within Income tax framework include

  • Abolishing the Dividend Distribution Tax (DDT) and
  • Switching to the classic shareholder tax system,
  • Expanding the lower withholding tax rate of 5% for defined interest income,
  • Lower withholding tax rate of 4% for interest income from long-term bonds / rupee-denominated bonds, etc.

Another welcome move introduced in Budget 2020 is an exemption in certain situations for non-residents to file tax returns in India. It subscribes to the position of not filing income returns to non-residents whose total income includes income through royalty or Fees for Technical Service (FTS).

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Any non-resident receiving taxable income from India is currently under an obligation to file income returns in India (except in certain specified cases).

  • The said condition of compliance places undue hardship upon non-residents.
  • In addition, there are serious criminal and prosecutorial implications for non-residents who fail to file tax returns in India.
  • There have been a large number of litigations and disputes over the filing of non-resident income returns.

Below are some practical scenarios in which tax treaty provisions provide for tax relief for non-residents on different income streams earned in India. Thus, in such cases, non-residents would still be required to file returns of income in India.

A. Non-resident earning income in the nature of FTS

Here are some of the illustrative cases where a non-resident may have to explore whether the exemptions are available under the tax treaty:

1. Availability of “make available clause” in the tax treaty (for example Australia, Singapore, Canada, the United Kingdom, the United States, Portugal, etc.)
2. Non-taxable management service in the tax treaty (for example the United States, Spain, the United Kingdom, Portugal, Canada).
3. Absence of the FTS provisions of the tax treaty (for example Philippines, Thailand, United Arab Emirates, Pakistan, Turkey, Libya, Mozambique, Myanmar, Nepal, etc.)
4. Most Favored Nation (MFN) clause in the tax treaty (for example Finland, Nepal, Sweden, France, Netherlands, Spain, Belgium, Hungary, Kazakhstan, Israel, etc.)

B. Non-residents earning income in the nature of royalty
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Similarly, non-residents receiving royalty income may need to investigate whether the exemptions available under the tax treaty, as mentioned below, could be opted for:

  1. Shrink-wrapped/off-the-shelf software (copyright vs. copyrighted article) – In most of India’s tax treaties, software profits will not be considered as “royalty” if the charge is for the usage of ‘copyrighted article’ rather than ‘copyright.’
  2.  The royalty of equipment will not be taxable for tax treaties entered into with Greece, Israel, Sweden, the Netherlands, etc.
  3.  The concept of royalty under the tax treaties may not include transmission by satellite, cable, optic fiber or similar technology.
C. Non-resident earning income from dividend

With the announced abolition of DDT, income from dividends would be taxable in the hands of non-resident shareholders and the Indian corporation would be liable to withhold tax on that income. The dividend is taxed at 20 percent (plus additional surcharge and cessation) under the Act. Moreover, some tax treaties entered into by India provide a much lower tax rate for income from dividends (i.e., 5%, 10%, 15%).

D. Non-resident earning income from interest

Current provisions of section 115A(1) of the Act provide for a 20 percent tax rate (plus applicable surcharge and cessation) on interest income earned by non-residents (except for certain specified interest income2). However, Some tax treaties signed by India,  provide a much lower interest income tax rate (i.e. 10 percent).

In addition to the above, it would also be worth considering the tax return filing in India in the following scenarios for the non-residents:

1. To Claim Refund in the return of income

2. Revenue from capital gains or income attributable to a permanent establishment (PE) in India

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