JANUARY 2019

With increasing globalization, more and more liberalization measures being adopted by the Government to attract Foreign Investments and cross border transactions becoming very common, understanding, interpreting and applying Foreign Exchange Management Act 1999 (FEMA) has become indispensable.

FEMA is not just for Big Corporates or businesses dealing in Foreign Exchange Transactions like imports, exports, Foreign Direct Investments etc., but is also very important for every individual who would have a potential impact of the law and regulations on account of their relocation to a different territory either outside India or into India for various reasons. Hence, the need for a layman to be informed well about the applicability of FEMA provisions is very high before he enters into any kind of transaction that would trigger FEMA Regulations.

In this Article, an attempt is made to simplify the understanding the basic concept of “Residential Status” as per FEMA. Before we understand who is a person resident in India and who is not a resident in India, let’s understand the definition of Person. Person includes:

An individual, HUF, Company, Firm, an Association of Persons and any agency, office or branch owned or controlled by such person- Section 2(u) of FEMA. In this Article, we are going to focus in detail on the identifying the Residential Status of an Individual alone.

Residential Status as per FEMA is always determined “from a particular date”. As per FEMA, the purpose/intention of an individual’s stay in India is most relevant to find out the residential status. The Act uses the word “reside” and not “stay”. Stay would mean mere physical presence, whereas an element of permanency is attached to the word reside. This state the intention of the law that only individuals who have the intent to reside with a degree of permanence will be considered as Residents in India.

Illustration 1 for Permanency: A Pilot might stay in India for more than 182 days in a financial year on account of his work demands during transit travel. This would not mean he resided in India and cannot not be considered a Resident as per FEMA as intention of a permanent stay is not established.

Illustration 2 for Permanency: Mr. Paul comes on a holiday to India and falls sick. He ends up staying in India for more than 182 days on account of his ill health. He has not come for employment or business or for any other reason for an uncertain period. He will leave India after his treatment and hence will not be considered a Resident.

Person Resident in India is defined under Section 2(v) of FEMA as:

A person residing in India for more than 182 days during the course of preceding financial year,but does not include... The exclusions of this definition are of two categories:

• a) With Respect to Persons leaving India and
• b) With Respect to Persons coming to India.

a) Persons Leaving India:

The following persons will not be considered a Resident though he has resided in India for more than 182 days in the preceding financial year:

• a person who has gone out of India or who stays outside India for employment outside India or
• carrying on business or vocation outside India or
• for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

The above category is very simple to understand as it just gives the list of persons who will not be a resident despite staying in India for more than 182 days in the preceding financial year.

b) Persons Coming into India:

This is a tricky category to understand as the definition reads as follows:

This clause has to be combinedly read with the main limb of the definition which states “A person residing in India for more than 182 days during the course of preceding financial year, but doesn't include...

a person who has come to stay in India, in either case, otherwise than :

• For taking employment in India or
• For carrying on business or vocation in India
• For any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period.

When these are combinedly read, we can identify that there is a second exclusion to the first exclusion. The net result that it tries to convey is:

If a person comes for any of the following purposes into India, he will be considered an Indian Resident as per FEMA.

• for taking employment in India or
• For carrying on business or vocation in India
• For any other purpose in such circumstances as would indicate his intention to stay in India for an uncertain period.

One lacuna in language that we will have to be careful and take a logical interpretation based on the intent of the law here is:

The main limb of the definition sets the basic criteria for a person to become a resident as; he should reside in India for more than 182 days in the previous year. Only when a person satisfies the first criteria, we can logically move on to the two exceptions after that, to finalise the person’s Residential Status. In such a case, it would lead to a situation which is better explained by way of an example below:

Mr. Sam has been a non-resident of India for 11 years. In Dec 2018, he comes to India on employment. Will Mr.Sam be considered an Indian Resident and from when?

On a plain reading of the Section, following will be inferred:

In FY 17-18 (preceding FY for 2018-19 in which Mr Sam came to India), Mr. Sam was in India for less than 182 days as per the main limb of the definition. Will Sam be covered under clause b and be considered a Resident?

We have already discussed that when a person does not get covered by the first limb, logically we cannot apply clause b. Hence from Dec 2018 to March 2019, he will continue to be a non-resident. In FY 19-20 too he will be a non-resident, since he did not reside in India for more than 182 days in FY 18-19.

This would lead to a situation where Mr. Sam would be considered a Non-Resident for almost 16 months from his entry into India for employment, which is in fact not the intent/purpose of the law. Hence, for this specific clause b alone, with respect to persons coming into India for employment, business or any other reason for an uncertain period, the main limb of the definition of the person to reside in India for more than 182 days becomes redundant, and he will be considered a Resident from the time of his entry into India.

This Article is an attempt to simplify the understanding of the Residential Status as per FEMA by bringing out the nuances that are present. One may have to be very careful before entering into any transaction regulated under FEMA based on whether the person gets covered under this definition as a Resident.

Is doing Business in India Easy? If you Google the same, you would find out that as per the recent study by World Bank India is currently at 77th place out of the total 190 Economies across the globe, whereas in 2014, India was at 142nd place in 2014 in the same ‘Ease of Doing business Index’ of World Bank, which means that the Indian Government is working towards creating hassle free environment for an ordinary Businessman and has continuously brought up major changes and reforms to make it a reality. The World Bank in its analytics uses several parameters such as Starting a Business, Dealing with Construction permits, Getting Electricity, Registering Property, Getting credit, Protecting Minority interests, Paying taxes, Trading across borders, Enforcing contracts, Resolving Insolvency to measure the ease of doing business in any Economy. The first and foremost parameter being ‘Starting a Business’ criterion, let’s Google another question is it easy to Start a Business in India? The answer would be ‘Yes and No’. Yes for the Government has brought out many changes and reforms to make it simplified and easier to start a Business in India and No for the same Government overlooks certain practical difficulties in getting it done and the entire process is not completely made easier compared to other countries. There are several forms of Business which an Entrepreneur can opt to run their business in India viz., Sole proprietary concern, Partnership firms, Limited Liability Partnerships (LLP), Companies, etc., out of all forms, a Company form being the most preferred one and sought after, let’s discuss in this article how easy is it to Incorporate a Company in India and the practical difficulties one could face while incorporating a Company.

Anybody who wishes to start a Company in India has to make an application to the Registrar of Companies (ROC), which is governed by the Ministry of Corporate Affairs, India (MCA). The ROC verifies the application and issues the Certificate of Incorporation (COI). In laymen terms, that is all about the Incorporation of Company in India. Now, let’s see what the law says about Incorporation of Companies.

With the introduction of Companies Act, 2013, a new incorporation rules called the Companies (Incorporation) Rules, 2014 was introduced with effect from 1st April 2014 superseding the Companies (Central Government’s) General Rules and Forms, 1956 relevant to the old Companies Act, 1956. Since the introduction of new rules specifically for Incorporation, there had been a total of 14 amendment rules passed in the last four years including the latest Companies (Incorporation) fourth amendment rules, 2018 brought in w.e.f 18th December 2018.

The Companies (Incorporation) Rules details how to incorporate various types of Companies including One Person Company and Not-for-Profit Companies (Section 8 Companies), lists out the number of applications to be made, desirability of Names of the Company, in what form and manner documents must be submitted/signed, procedures to convert one type of Company into another type of Company and the list goes on. In short, the rule governs provisions relating to the overall formation of a Company and the governance related to that. In this article, we wish to detail only on the part of how to successfully incorporate a Company and hence, not going into the details of other provisions of the Companies (Incorporation) Rules.

Let’s analyze step by step, the process to Incorporate a company in India:

Step 1 - Name availability:

The first and foremost step is to choose a Name for the Company and find out if the name is undesirable as per Rule 8(2) of the Incorporation Rules, 2014 which lists out 21 clauses (out of which three are already omitted in the later amended rules) to decide whether the proposed Name can be approved by the registrar. The primary rule is that a name cannot be approved if there is an existing company or LLP which has a similar or name which closely resembles to the applied name.

The Easy part:

Before an application for Name is made, there is an option called ‘Check Company Name’ in the MCA website which will provide you a list of Companies/LLPs operating with a similar name. By checking the option, one can avoid possible rejection of the applications and it will also save time and cost.

The Difficult part:

The name check option will only provide you a list of names of Companies with same name and the same spelling it cannot auto detect if there is already a name of an existing Company which has the same meaning or if the name is a plural version of the same name or has a different spelling but pronounced the same way. In these cases, there are high chances that the application for the name could get rejected even when the name check option does not throw up any errors. And to this, the only solution is to check the Company name in the website with all the combinations after going through all the rules for Name availability.

Step 2 - Name Application :

Once you have satisfied with yourself that the name is available for your proposed company, the next step is to apply for it. There are two ways through which one can apply for Name, one through a RUN (Reserve Unique Name) Service available in the MCA portal or make an application for the name along with all other documents for Incorporation through the SPICe form (which we will discuss in detail in the later section of this article).

The Easy Part:

RUN service is the easiest in the entire Incorporation process. Just click a button, select what type of company you would like to Incorporate, Enter the proposed Name of the Company (there are two options given for any applicant), Check the name again, enter the Objects of the Company and upload relevant documents like registered Trademark for the name, NOC for use of Trademark, etc and submit your application by making the payment of the applicable fee. Within two days (to be precise 1.34 days as per the MCA website), the application will be processed by ROC.

The Difficult Part:

In case, the name applied is not satisfying the conditions of the Name availability rules, the application will be sent for resubmission to be resubmitted within 15 days after rectifying the defects mentioned in the resubmission request and in case, if the errors are not rectified in the resubmission or the resubmission is not made within 15 days, the name application will get rejected. And the fee that is paid for application of the Name will not be refunded in case the application is rejected. The fee will be higher compared to the ‘Zero fees’ for application for Incorporation of Company with authorized capital upto 10 lakhs and the timeline and the number of times the application can be rectified/resubmitted is restricted. And one has to be highly cautious while making the application for Name approval, though it is simple and easy to make, the cost and time could be higher if the application is not made correctly.

Step 3 : Obtain DSC (Digital Signature Certificate)

This step can be either prior to Name approval or after that as the Name application form does not require any Digital Signature to be submitted. A digital signature class II certificate is mandatory for anyone making the application for Incorporating a Company and hence getting one is very crucial in the entire process.

The Easy part:

It is very easy to apply for a digital signature and the cost of it can start as low as from just Rs.700 and the time that would take to get it done would be maximum of one day. It can be applied with a validity period of one or two years and has to be renewed at the end of every one or two year by paying a renewal fees.

The difficult Part:

The documents required and the authentication procedures for a Non Resident/Foreign National are many and hence the time taken to collect all documents and make an application for digital signature would be a time consuming activity. Hence, it is always advised to initiate the process of collecting all documents and getting it notarized and authenticated by the government/embassy/officials at the earliest possible to avoid any delays.

Step 4 : Preparation of documents and filing of Incorporation form:

With the introduction of SPICe (Simplified Proforma for Incorporating Company Electronically) form, the process of making an application for incorporation has been considerably simplified. Now, one can make an application for the Name of the Company, DIN (Director Identification Number) for proposed directors of the Company, update the Registered office address of the Company, file declarations by the members and directors, make an application for issuance of PAN (Permanent Account Number) & TAN (Tax deduction and collection Account Number) and application for Incorporation can be done through single form called SPICe. Along with the SPICe form, one can also file e-MOA & e-AOA the online version of companies’ Memorandum and Articles of Association. Thus, the submission and preparation of paper documents has been considerably reduced. The application form SPICe, e-MoA & e-AoA has to be signed electronically using DSC. Thus, all the shareholders and members are mandatorily required to have DSC to submit this form.

The Incorporation application has to be made with the following documents:

• 1.Though e-MOA and e-AOA has been introduced, physical drafting of MOA and AOA has been mandated in the following cases and the copy of the signed MoA & AoA has to be submitted.
  • a. Section 8 company – Not-for-Profit Companies
  • b. All or any of the non-individual first subscribers are based outside India or
  • c. Number of subscribers entered (non-individual + individual)’ are more than seven
  • d. In case of foreign national individual subscriber who does not have DIN already and does not have a valid Business visa to visit India. (The foreign national must have visited India with valid business visa at the time of signing the MoA and AoA, in such cases, e-MoA and e-AOA will hold good. In all other cases, physical copy of MoA and AoA is mandatory)
• 2. Declaration by first subscribers and first directors. Each founder and proposed director has to submit an declare that he/she is not convicted of any offence in connection with the promotion, formation or management of any company, or has not been found guilty of any fraud or misfeasance or of any breach of duty to any company during the preceding five years and that all the documents filed with the Registrar for registration of the company contain information that is correct and complete and true to the best of his knowledge and belief.
• 3. Proof of office address – typically an agreement with the landlord of the office premises or a No Objection certificate from the Landlord to use the address of the premises. And along with that a copy of utility bill to be attached in the name of the Landlord who has signed the NOC or Agreement.
• 4. Copy of approval in case the proposed name contains any word(s) or expression(s) which requires approval from Central government. (This is not applicable if name is already approved by the MCA but to be attached at the time of making application through RUN)
• 5.Approval of the owner of the trademark or the applicant of such trademark for registration of Trademark in case the proposed name uses the Trademark. (This is not applicable if name is already approved by the MCA but to be attached at the time of making application through RUN)
• 6. In principle approval from the concerned regulator, if proposed name requires approval from any sectoral regulator. (This is not applicable if name is already approved by the MCA but to be attached at the time of making application through RUN)
• 7. Copy of certificate of incorporation of the foreign body corporate and resolution passed. If any subscriber to the proposed company is Foreign company and/or company incorporated outside India.
• 8. Resolution passed by promoter company
• 9. In case the name is similar to any existing company, a certified true copy of No objection certificate by way of board resolution / resolution (This is not applicable if name is already approved by the MCA but to be attached at the time of making application through RUN)
• 10. In case of an OPC, it is mandatory to attach:
  • a.Consent of nominee
  • b.Proof of identity and residential address of the nominee
• 11.If any one of the subscriber does not have a DIN, it is mandatory to attach, Proof of identity and residential address of the subscribers
• 12.If any of the director (including subscriber cum director) does not have DIN, then it is mandatory to attach, Proof of identity and residential address of such director.

The Easy part:

The use of e-MOA, e-AOA will reduce time and cost for preparation of the documents and only one form required to be used to submit all the documents. Use of different forms separately for Name approval, DIN, Registered office address has been withdrawn. If you are an Indian national, preparation of all these documents will take no more than half a day and filling up the application will take less than that time. If you have already obtained the name approval and made the application with all the appropriate documents, you might get the Certificate of Incorporation (COI) along with PAN and TAN within a day’s time. If any mistakes are found, you will be notified of the same within a maximum of 2 days and an option to make a resubmission is provided to the applicant twice for an application. The cost of the application is reduced and there is no fees payable for application if the authorized capital of the Company is upto 10 lakhs, whereas a minimal stamp duty has to be paid by the applicant while filing the application.

The difficult Part:

If you have already applied for a Name and it is approved by the MCA, it has a validity of only 20 days from the date that is approved and hence, the timeline that is available to you after obtaining name approval is very short, particularly if you are a foreign national, all the documents that has to be submitted has to be notarized and apostilised according to the country that the foreign national is from. The timeline for getting the document may vary from country to country and it is definitely a time consuming process for anyone who comes to India with an objective to start a business in India. Apart from the documentation part, filing of all documents in a single form though is easier, but the size of the form cannot exceed more than 6 MB. With so much of attachments required in a single form, you would rather prefer filing different forms than compressing all the attachments and trying to bring down the size of the form to less than 6 MB.

We have covered the general outline of the entire Incorporation process in a simple language and an attempt is made to highlight the easy processes which one can make use of and the difficulties one has to keep in mind while making an application for Incorporation of a Company in India. There are various other issues which one might go through while making an application like system configuration related issues, issues in understanding the law and unable to decide on case to case basis whether to use e-MOA,e-AOA or physical copies to be prepared, issues in deciding whether a name will be approved without any conflict and other issues which are not addressed by MCA, those issues can be clarified through the MCA portal by raising a compliant/query to the department who takes up usually a week’s time to answer your queries or solve the issues. Thus, in general MCA has so far made efforts to reduce the time and cost to incorporate a Company and brought transparency in managing the formation of a Company.

Conclusion:

After going through all the process and the timeline involved in Incorporating a Company, hope you have the answer to the question now, is it easy to start a business in India? Yes and No. And that is the reason though India has gained many scores to go up the ladder in ease of doing business Index, in Starting a business criterion, India is still at 137th Rank well behind many smaller economies across the globe. At the same time, India has gained over 21.82 points in the score board in the last few years to reach the 137th Rank and it is entirely due to the series of reforms the government has been bringing in over the last four to five years. Let’s hope that more reforms that would boost the economy is brought up and which will also provide a better platform for an ordinary businessman to transact his everyday business.

An Insight on Reverse Charge Mechanism under Goods and Service Tax Legislation Goods & Service Tax (GST) is an Indirect Tax levied on the supply of goods and services which is considered to be a major reform introduced with effect from 1st July 2017. The GST Legislation in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.

In a developing, huge and diversified country like ours, which was and still is predominated with many unorganised sectors/ businesses, susceptible to potential tax evasion and other tax manipulations, introduction of GST has been a historic event. To minimise and mitigate the difficulties persisting in the unorganised sector, GST Law has inbuilt the concept of Reverse Charge Mechanism.

The basis for introduction of Reverse Charge Mechanism takes us back to section 68(2) of the Finance Act, 1994 wherein government has reserved its right to make any person liable to pay service tax within the constitutional boundaries, by way of notification. So, this concept is a carryover from the already existed Service Tax Laws and not new to GST.

Generally, the supplier of goods or services is liable to pay GST. However, in specified cases like imports and other notified supplies, the liability is cast on the recipient under the reverse charge mechanism. Reverse charge means the liability to pay tax is on the recipient of supply of goods or services instead of the supplier of such goods or services.

Under GST Legislation, in contrary to earlier Indirect Tax regime, reverse charge was introduced in the following scenarios.

• A. Supply from an Unregistered dealer to a Registered dealer If a registered dealer is procuring goods or services from an unregistered dealer then, the registered dealer will be liable to pay tax on supply. – as featured in provisions of section 9(4) of CGST Act, 2017 & Section 5(4) of IGST Act, 2017.
• B. Supply of certain goods and services specified by CBEC. All other categories of supplies as notified by GST Council will fall under reverse charge. The list of goods and services on which payment of GST under reverse charge shall be applicable is notified by CBEC on recommendations of GST Council. - as featured in provisions of section 9(4) of CGST Act, 2017 & Section 5(4) of IGST Act, 2017.
• C. Services through an e-commerce operator If an e-commerce operator supplies services then reverse charge will be applicable to the e-commerce operator i.e GST shall be payable by e-commerce operator. If the e-commerce operator does not have a physical presence in the taxable territory, then a person representing such electronic commerce operator for any purpose will be liable to pay tax. If there is no representative, the operator will appoint a representative who will be held liable to pay GST. For example, When an Urban Clap provides services of plumbers, electricians, teachers, beauticians etc. to registered as well as unregistered customers, Urban Clap is liable to pay GST on the services of such plumbers, electricians etc.,

The implementation of reverse charge mechanism as per Clause A has been suspended till 30th September 2019.
Whenever a person becomes liable to pay tax on reverse charge basis, the following provisions shall be applicable:

Compulsory registration under GST

It is mandatory for all taxpayers liable to pay tax under reverse charge to get themselves registered under GST irrespective of the threshold limit of INR 20 Lakhs.

Input tax credit (ITC)

Tax paid on reverse charge basis shall be available for input tax credit if such goods and/or services are used, or will be used, for furtherance of business. The recipient (i.e., who pays reverse tax) can avail input tax credit.

Time of Supply of Goods & Services

A. Time of Supply in case of Goods

Understanding the trigger point for payment of taxes is very important in law. In GST, the trigger for payment of tax is the Time of Supply. Not only one has to know what is a supply, when something becomes a taxable supply due for payment is also very important. Time of Supply only enables us to determine the rate of tax, value of tax and due date for payment of taxes.

In case of reverse charge, the time of supply shall be the earliest of the following dates:

• The date of receipt of goods
• The date immediately after 30 days from the date of issue of an invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

B. Time of Supply in case of Services

In case of reverse charge, the time of supply shall be the earliest of the following dates

• The date of payment
• The date immediately after 60 days from the date of issue of invoice by the supplier

If it is not possible to determine the time of supply, the time of supply shall be the date of entry in the books of account of the recipient.

Concept of Self-Invoicing

Self-invoicing is to be done when you have purchased from an unregistered supplier and such purchase of goods or services falls under reverse charge. In case of import of goods or services wherein the IGST is being paid by the recipient under reverse charge, the invoice shall be raised by the recipient in order to avail the GST input tax credit and refund in specific scenarios.

This is due to the fact that the supplier cannot issue a GST-compliant invoice to you, and thus the recipient becomes liable to pay taxes on their behalf. Hence, self-invoicing, in this case, becomes necessary.

Compliances in respect of reverse charge mechanism

• 1. As per section 31 of the CGST Act, 2017 read with Rule 46 of the CGST Rules, 2017, every tax invoice has to mention whether the tax in respect of supply in the invoice is payable on reverse charge. Similarly, this also needs to be mentioned in receipt voucher as well as refund voucher, if tax is payable on reverse charge.
• 2. Maintenance of accounts by registered persons: Every registered person is required to keep and maintain records of all supplies attracting payment of tax on reverse charge.
• 3. Any amount payable under reverse charge shall be paid by debiting the electronic cash ledger. In other words, reverse charge liability cannot be discharged by using input tax credit. However, after discharging reverse charge liability, credit of the same can be taken by the recipient, if he is otherwise eligible.
• 4. Invoice level information in respect of all supplies attracting reverse charge, rate wise, are to be furnished separately in the table 4B of GSTR-1.
• 5. Advance paid for reverse charge supplies is also leviable to GST. The person making advance payment has to pay tax on reverse charge.
• 6. An ISD cannot make purchases liable to Reverse Charge. If the ISD wants to procure such supplies and take the Reverse Charge paid as credit, the ISD should register as a Normal Taxpayer.

Conclusion

In a nutshell, the onus of ensuring GST collecting from unorganized sectors which are way beyond the monitoring mechanism of the Government, has been shifted to the registered dealers. Though it’s true that registered sealers are helping the Government in complying with this, non-compliance would lead to Interests and penalties that could be damaging to the registered dealer. Awareness, understanding and implementation is very crucial to be compliant with the GST Laws.

Various Liberalisation measures of the Indian Economy has led to attraction of Foreign Capital contributing to the development and growth of Domestic Companies in India. Foreign Direct Investments have been encouraged through the measures of RBI simplifying the process of investment, wherein majority of the sectors fall under the automatic route of investment not requiring any prior RBI approval.

India being a growing economy and improving in the ranks of ease of doing business, and also the market for a lot of innovative start-up businesses coming up, has been a major attraction for foreign nationals, foreign companies, Multi National Giants, Venture Capital Funds etc., The return on Investment for a majority of stake holders who fund the Indian Companies in the form of equity shares is the Dividend distributed by the Domestic Companies. This Article focuses on the taxability of such dividends paid in the hands of the Company as well in the hand of a Foreign Individuals in specific. This Article intends to take the reader through the manner/ sequence to be followed to conclude the taxability of an Income under the Income Tax Act 1961.

TAXABILITY FOR A COMPANY ON DISTRIBUTION OF DIVIDEND:

Dividends are distribution to the shareholders of a Company out of the Profits / Retained Earnings of a Company. It’s a return on Investment paid for the shareholders of the Company. Taxability of such dividends in the hands of the Company is governed by Section 115-O of the IT Act. Its termed as Dividend Distribution Tax (DDT)

Sec 115-O reads as follows:

(1) Notwithstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of fifteen per cent.

It also has to be noted that the above rate of 15% has to be grossed up while calculating the DDT. An illustration is as follows:

Amount of Dividend declared:Rs 1,00,000

1. DDT (15% grossed up rate 17.65%)
2. Grossed up Dividend - Rs 117647
3. Dividend - Rs 17647
4. The rate of dividend to grossed up dividend would work out to 15%

TAXABILITY FOR A FOREIGN INDIVIDUAL ON DISTRIBUTION OF DIVIDEND:

Step 1: Find if the Income comes under the Scope of Taxability for the Foreign Individual.

(1)The Scope of Taxability of an Income is defined under Section 5 of the Income Tax Act. The Taxability of an Income of a Non-Resident is defined under Section 5(2) as follows:

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

• (a) is received or is deemed to be received in India in such year by or on behalf of such person; or
• (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Section 9 of the Income Tax Act defines the income that shall be deemed to accrue or arise in India as:

all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Based on the above definitions, dividend received from a domestic Company will be taxable for a non-resident in India.

Step 2: Ascertain Exemptions if any applicable for the Income under the Act

Exemptions under Income Tax Act:

Section 10 of the IT Act provides for exemptions by defining Income which do not form part of Total Income.

As per Sec 10(34) any income by way of dividends referred to in section 115-O :

[Provided that nothing in this clause shall apply to any income by way of dividend chargeable to tax in accordance with the provisions of section 115BBDA;]

Section 115BBDA taxes dividend received in aggregate exceeding ten lakh rupees, by a specified assessee who is resident in India. Hence, this section does not apply to a Non-Resident which is the subject matter of our discussion.

Double Taxation Avoidance Agreement Benefits:

India has signed treaty with various other countries to help tax payers avoid paying double taxes on their income earned from the source country as well as the residence country.

Sec 90 of the IT governs DTTA Benefits. Sec 90(2) specifies:

Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

Eg: Article 10 of DTAA with Singapore allows for taxation of dividends paid to resident of Singapore by an Indian Company who is an individual to the tune of 15%. But , since as per the IT Act, Dividends paid to a Non-Resident becomes tax free as seen above, IT act is more beneficial to the assessee and hence he can choose to apply the same.

Step 3: Mode of Payment of Taxes in case of Taxability

Once its confirmed as per Step 1 that a particular Income is taxable, and there are no exemptions available as per Step 2, we should analyse how such tax is expected to be collected from the Non-Resident by the Indian Government.

Any payments made to Non-Residents, IT Act prescribes withholding Tax provisions under Sec 195.

Sec 195(1) reads as:

Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.

It has been made very clear that, there is no withholding tax requirement on dividends paid under Sec 115-O.

The rates for deduction of taxes from payment to non-residents have been defined under Sec 115A of the IT Act. If we read Sec 115A (1) (a) it reads as:

• (1) Where the total income of
  • (a) a non-resident (not being a company) or of a foreign company, includes any income by way of
    • (i) dividends other than dividends referred to in section 115-O

  Hence, Sec 115A does not specify a tax rate for dividends paid under Sec 115-O.

  
  

Step 4: Necessity for filing Income Tax Returns by a Non-Resident

We have to refer to two sections in case of a Non-Resident to conclude if he is liable to file his Income Tax Returns in India:

Sec 115 A (5) specifies

It shall not be necessary for an assessee referred to in sub-section (1) to furnish under sub-section (1) of section 139 a return of his or its income if—

• (a) his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to in clause (a) of sub-section (1); and
• (b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income

clause (a) of sub-section (1) specifically excludes dividends paid under Sec 115-O, and hence this section cannot be referred to for finding out if Income Tax Returns filing is required for a Non- Resident having dividend income paid under Sec 115-O.

Sec 139(1) states:

(1) Every person—

• - being a company or a firm; or
• - being a person other than a company or a firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax,

shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed54 form and verified in the prescribed manner and setting forth such other particulars as may be prescribed :

In the case of a Non-Resident receiving just dividends which is tax free in his hands as per the various provisions we have discussed above, his total income will not exceed the maximum amount not chargeable to tax and hence will not be required file his Income Tax Returns as per Sec 139(1).

CONCLUSION:

To determine the taxation impact on a Foreign Individual on the Dividends he receives from an Indian Company, we have seen in this Article that a series of Sections like Sec 5, Sec 9, Sec 115-O, Sec 115-BBDA, Sec 10(34), Sec 115A, Sec 195, Sec 90, Sec 139 all had to be interlinked and understood. Its more about sequencing, analysing and interpreting the various sections to understand the law in depth and applying the same for the relevant case.