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Gift Tax on Non-Resident

Taxsutra |

12 July 2019

The Hon'ble Finance Minister, in her maiden speech has attempted to tinker with the principle of territorial nexus by introducing tax on a non-resident receiving any sum or property from a resident for inadequate consideration or without consideration. In the ensuing paragraphs an attempt has been made to elucidate and discuss fewer aspects of these proposals.

As per provisions of section 5 of the Income Tax Act, 1961 ('Act'), a non-resident is taxable in India only in respect of income that accrue or arise in India, or deemed to accrue or arise in India, or is received in India, or is deemed to be received in India. Accordingly, a non-resident on receipt of property from a resident adopts a position so that the same is not taxable in India, on the premise that such receipt of property did not accrue or arise in India.

However, with the intent to plug this loophole, in case of non-residents, the Finance (No 2) Bill 2019 proposes to insert section 9(1)(viii) of the Act and thereby widen the scope of 'income deemed to accrue or arise in India' to include any sum of money or specified property in India transferred, on or after 05 July 2019 from a resident to a non-resident for inadequate consideration or without consideration.

However, the Finance (No 2) Bill 2019 clarifies that the exclusion provided to specified transactions such as receipt of property from relative, under a will, in specified cases, etc. [as provided under section 56(2)(x) of the Act] would continue to apply in case of receipt of property by a non-resident taxpayer. The Memorandum to the said Bill further clarifies that the provisions of the applicable Tax Treaties with India would continue to apply in such cases.

On closer examination of the aforesaid proposals, a fewer aspects that requires considerations are as under:

  • Meaning of the expression 'property' - The explanation to section 56(2)(x) of the Act provides that the expression 'property' shall have the same meaning as assigned in explanation to section 56(2)(vii) of the Act. The said explanation defines 'property' to mean following capital asset of the assessee, namely:- immovable property, shares and securities, jewellery, drawings, paintings, any work of art, bullion, etc. However, in case of transfer of intangible properties such as patents, trademarks, etc. the aforesaid proposals may not be applicable. Further, in case immovable property or other specified property acquired from a resident by a non-resident as a stock-in-trade and not as a capital asset, can be contended as not taxable in India.
  • Applicability in case of transfer involving two non-residents - The aforesaid proposals takes into account transfer of specified properties from a resident to a non-resident. However, the aforesaid proposals do not cover cases where shares or other specified properties in India are being transferred by a non-resident to another non-resident.
  • Tax Treaty provisions - As mentioned above, the provisions of the applicable tax treaty shall apply in the above proposals.

In this regard, as per article 21(1) of the UN Model, item of income of a resident (not dealt in other Articles of the UN Model) shall be taxable only in the state of resident. However, article 21(3) of the UN Model overrides article 21(1) to provide that item of income of a resident (not dealt in other Articles of the UN Model) and arising in the other contracting state may also be taxed in state of source. In this regard, a question may arise whether an income which is deemed to accrue or arise in India [as per the provisions of section 9(1)(viii) of the Act] would be extended to mean income arising in India for the purpose of interpreting provisions of the tax treaty? Separately, it is noteworthy to keep in mind that India's tax treaty with several countries vary from the aforesaid UN Model. For instance, some tax treaties

  • Do not have provisions relating to other income; or

  • Such provisions do not give taxing rights to India; or

  • Such provisions do provide taxing right to India but only in relation to income in the form of lotteries, crossword puzzles, races including horse races, card games, etc.

Accordingly, depending upon the language in the applicable tax treaty, the non-resident would be required to analyse its taxability.

Lastly, in view of the above proposals, a non-resident receiving specified property for no consideration or inadequate consideration is liable to be taxed in India and therefore will be required to obtain tax registrations in India as well as undertake return filing compliances. However, towards reducing compliance burden on non-resident and with an intent to plug the loophole, should higher threshold value of transaction(s) be prescribed? Alternatively, once the resident transferee has withheld taxes on behalf of the non-resident and has paid the same to the Indian Government, no additional compliances are required to be undertaken by non-residents, these are few areas that need to be thought upon. Also, in case of outbound merger of wholly owned Indian subsidiary with its overseas parent, presently, there are no provisions relating to tax neutrality. In such a case, would the transfer of assets of the Indian subsidiary for cancellation of shares, be considered as inadequate or no consideration and thereby would the overseas parent be burdened with this proposed additional tax or not, is a question that needs deliberation.

The views expressed in this article are personal views of the author and shall not be construed as professional advice.