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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CBDT sets March 31 deadline to complete Panama, Paradise Papers probe

CBDT is trying to complete this investigation early so that other investigative agencies can speed up their investigation. The Central Board of Direct Taxes (CBDT) is currently investigating on these cases in the Foreign Exchange Management Act, as soon as the tax department begins filing criminal cases CBDT will have the basis to convert these cases into the Money Laundering Act.

CBDT after completing the investigation may file prosecution charges against these entities,  to help other agencies to take action against those entities.

About 426 Indian companies with offshore accounts were under income tax department scrutiny in 2016. Over Rs, 1,000 crores of hidden income had been discovered by the department in Panama Papers alone, listing many famous personalities including KP Singh from DLF, Amitabh Bachhan, Aishwarya Rai, Sameer Gehlaut.

  • Around  714 companies and individuals had been identified in the case of Paradise Papers that came to light in 2017
  • Former state minister of Jharkhand Jayant Sinha is also named in this case who is a  member of the Hazaribagh parliament in Jharkhand state.

Appleby, A Bermuda-based legal services provider and Asiaciti based in Singapore, disclosed much of the data on   Paradise Papers which facilitated the establishment of low or zero tax rates on offshore firms.

Currently, CBDT is investigating these cases within the context of the Foreign Exchange Management Act. Once the tax department begins filing prosecution cases we have the basis to transform our case under the Money Laundering Prevention Act.

These cases are currently being investigated by the income tax department under the 2015 Black Money Act. Under this Act, if any person who is unable to justify the source of the funds in question will be required to pay a penalty of nearly 300 percent of the applicable tax liability on it.

These cases are not subject to domestic inquiry; the department is entirely dependent on foreign agencies for information. For the investigator as well as for the agency, therefore, setting a deadline for completing the investigation is not desirable.

Panama and the Paradise Papers mentioned only company names. Finding data from foreign agencies requires proper information that is not available to the department, thus slowing the investigation. Sometimes the department’s own machinery strikes down the request because the department has set unfulfilled SOPs.

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Changes via Company Auditor’s Report Order , 2020 CARO

CARO Reporting, 2020 being notified

MCA has notified particular issues being important & thereby should be reported as per particular norms with the financial statements for certain entities as a part of their audit reports for almost all companies except a few below.

Banking, Insurance, Charitable setups & small cos. or OPC has been kept out of this exercise. Also, some smaller setups with below norms are exempt from this as below –

  • Not a holding or subsidiary of a Public company
  • Paid-up Capital plus Reserves l< 1 Crore at the reporting date.
  • Borrowings less than or equal to Rs. 1 Crore at any time during the year
  • Revenue less than or equal to Rs. 10 Crores in the financial year

Key points of change suggest towards-

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  • Whether the company is maintaining proper records showing full particulars of intangible assets
  • Reporting on revaluation of Property, Plant and Equipment’s by company
  • Reporting of proceedings under the *Benami Transactions* (Prohibition) Act, 1988. i.e. whether the company has appropriately disclosed the details in its financial statements
  • Reporting if the *stock statements filed with banks* are in line with books of accounts, if the company was sanctioned working capital limits in excess of five crore rupees or more from banks or financial institutions. To report any discrepancies of 10% or more in the aggregate for each class of inventory
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  • Report quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details
  • Reporting of *investments* in or providing of any *guarantee or security* or granting any loans or advances.
  • Loans overdue for more than 90 days, *evergreening of loans, reporting on any *loan default*, etc.
  • Report on evergreening of loans – specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year
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  • Reporting of compliances with RBI directives* and the provisions the Companies Act with respect to deemed deposits.
  • Reporting with respect to transactions not recorded in the books of account but now surrendered or disclosed as income in the income tax proceedings.
  • Report on  balances outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures, and associates
  • Reporting on treatment by the auditor of *whistle-blower complaints* received during the year by the company
  • Reporting on the internal audit system
  • Reporting on cash losses
  • Reporting on the resignation of the statutory auditors
  • Reporting on the uncertainty of company capable of meeting its liabilities
  • Reporting transfer of *unspent CSR* amount to Fund specified in Schedule VII
  • Investment, Guarantee & Security given has been covered now along with loans & Advances – in terms of benefits to the company
  • Clarification required for Non-Disclosure of Properties taken on Lease by the Lessee
  • Auditor has to specifically comment on coverage and procedure adopted as per audit approach Also Materiality has been  defined as 10% or more in each class of Inventory

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  • Income tax compliance calendar for May 2024
    Income tax compliance calendar for May 2024 May 7 The deadline for paying April 2024’s TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) liabilities May 15 1. Date by which TDS certificates must be issued for taxes deducted in March 2024 under sections 194-IA, 194-IB, 194M, and 194S. 2. The […]
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  • Advance Tax vs Self-Assessment Tax
    Difference Between Advance Tax and Self-Assessment Tax Advance Tax The term “advance tax” in India describes the tax that people, corporations, and businesses pay up front rather than waiting until the end of the fiscal year. Salaried workers typically use TDS, which is run by their employers, to fulfill their advance […]
  • Deductions under Indian Income Tax Act for Individuals and HUFs (FY 2023-2024)
    Deductions under Indian Income Tax Act for Individuals and HUFs. Individuals and Hindu Undivided Families (HUFs) have the opportunity to lower their tax burdens by leveraging various deductions offered under the Indian Income Tax Act. These deductions aim to promote savings, investments, and specified expenditures. Mastering and applying these deductions can […]