Non Resident Taxation - How Residential Status of Non-Residents is determined?

 

The last year budget has provided with major changes in determining the residential status of the Non-Resident Indians or Persons of Indian Origin (PIO) for the purpose of filing NRI Income Tax Return in India.
 
These provisions have majorly impacted the residential status as well as liability of NRI Income Tax Return filing in India.  In this article, we will be discussing about changes made in definition of Non Resident Indian.

 
New Rules for determining the NRI Residential status:

1. As per provisions of the Act, a person shall be considered as Non Resident in India in case his period of stay in India during previous year is less than 182 days.  
2. Further, in case period of His stay in India during last 4 years preceding the previous year was less than 365 days and period of his stay during previous year was less than 60 days, even then, He will become Non Resident.    
3. As per Explanation (1A) to section section 6(1) which has been newly inserted, concept of deemed resident has been introduced. As per same, any citizen of India whose total income from India exceeds Rs 15 lac during the previous year shall be deemed to be Resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria.  

4.       Further, the definition of Not Ordinary Resident in India has also been amended. A person is said to be "not ordinarily resident" in India in any previous year if such person is--
(a)   Non-resident in India in nine out of the ten previous years preceding that year, or
(b)   Non Resident in India for more than 729 days during the seven previous years preceding that year.
(c)    A new clause (c) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He is an Indian citizen or a person of Indian origin and His total income from India exceeds Rs 15 lac during the previous year and his period of stay in India is 182 days or more but less than 180 days.
(d)   Further, new clause (d) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He a citizen of India who is deemed to be resident in India under clause (1A). 
 
It may be noted that as per the amendment in Section 6, the time period reduced to 120 days is only applicable in cases where the total accrued income in India of the visiting person in a particular financial year is more than Rs. 15 Lakhs. As was the case earlier, if a person’s total income earned in India in a fiscal year is up to Rs. 15 Lakh, they will continue to have their NRI status, even if their stay period has not exceeded 181 days.
 
The visiting Indian person is required to keep a track of all his taxable income accrued in India as well as the number of days of their stay in India. This is to be done because in case the Indian taxable income exceeds the mark of Rs.15 Lakhs, then the provisions related to stay period of more than 120 days will be applicable on them.
 
Any NRI with a stay period of 120 days or more and whose taxable income has exceeded Rs. 15 Lakhs, is required to check whether their stay period in the immediate preceding 4 years is 365 days or more. If their stay period in the preceded immediate 4 years is 365 days in total then they will be treated as a resident Indian and not NRI for the tax purposes. E assessment income tax
 
However, such individuals will be treated as Resident but Not Ordinarily Resident (RNOR) providing them with a relief that their income accrued outside India will not be taxable under Foreign Income Tax in India.
 
Why aforesaid determination of Residential status in case of Non Resident Indians is important?
 
Determination of residential status is important to correctly compute the Income Tax Liability of Non Resident and also for filing NRI Income Tax return.
 
This is due to the fact that unlike Residents, whose global income is taxable in India, in case of NRIs, only income accrued or arise or deemed to be accrued or arise and/or received in India is taxable. Therefore, in case any NRI does not have any income from India, there is no need to file NRI Tax return in India.
 
There may be situation that a person has been NRI for some years but becomes Resident in a particular year, in such case, for that year, his income from foreign country will also become taxable in India and in such case, he need to file his Income tax return from Indian as well as foreign source. However, as per DTAA applicable between both countries, he would be entitled to claim proportionate credit of taxes paid in foreign country.

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How Residential Status is determined in case of NRIs

 

Residential status is an important criterion to understand the liability of NRI to pay taxes in India as well as liability for NRI Income Tax return filing.

As per the provisions of the Income Tax Act, the taxability of income also depends upon the residential status of any individual. As a general rule,

1. In the case of Residents, their global income becomes taxable in India. Therefore, in case any Resident has also earned income outside India during any previous year, He might have paid tax in that country since the source of such income was outside India. Also, He would be liable to pay taxes in India since he was Resident in India. In such a case, there would be double taxation. However, He would be entitled to claim proportionate credit of taxes paid outside India while filling his Indian Tax Return.
   
2. In the case of Non-Residents, only income which has been accrued in India or deemed to accrue in India or received or deemed to be received in India is taxable in India. Therefore, income which has accrued outside India or received outside will not be taxable in India, and no need to show such income during NRI Income Tax return filing.
3. In the case of Residents but not ordinary Residents (RNOR), only income which has been accrued in India or deemed to accrue in India or received or deemed to be received in India is taxable in India. Further, Income which accrues or arises outside India from a business controlled in India or a profession or business set up in India would be taxable in India.

It is because of aforesaid reason, it is important to determine residential status since it will help in determining tax liability as well as liability for filing Income Tax Return by NRI.

Determining Residential Status of Person

RESIDENT

To be qualified as a Resident of India, an individual must fulfill these two conditions as follows-

1. He/she has stayed in India for more than 182 days during a particular financial year. OR
2. He/she has stayed in India for 60 days or more in total during a particular financial year. Also, they have stayed in India for 365 days or more for four years preceding the financial year.

In case none of the conditions stated above is satisfied then, the individual is categorized as a Non-Resident Indian (NRI). Also, it is to be noted that if any Indian citizen or a Person of Indian Origin (PIO) is visiting India and their total income during that particular financial year from all the Indian sources exceeds Rs. 15 Lakhs, then the above mentioned period of 60 days is to be read as 120 days in total. In other scenarios, it will be taken as 180 days in total.

NON RESIDENT

Any person, who is Not Resident in India as per aforesaid conditions, will become Non-Resident Indian.

RESIDENT BUT NOT ORDINARY RESIDENT (RNOR)

To be categorized as a Resident and Ordinarily Resident (ROR), a person shall fulfill the following conditions-

(a) He must have been a non-resident in India in 9 out of 10 previous financial years preceding that year, 

OR

(b) His period of stay in India during the last 7 previous years preceding that year has been for 729 days or less.

Further, due to recent amendment, an individual will be treated as resident but not ordinarily Resident if taxable income exceeds Rs 15 lakh and stays in India for 120 days or more (but less than 182 days) and is treated as a resident individual. Income Tax Return Filing

When should NRIs file their Income Tax Return (ITR) in India?

NRI Tax return becomes compulsory in the following situations:

1. When NRI has income from India which exceeds Rs 2.5 lac.
2. When there is a refund receivable.
3. In the case of the sale of shares and assets, if there is a capital gain or loss transaction.
4. When NRI wants to carry forward losses from the sale of shares or business.

A Complete Guide for Branch Office Registration in India

A foreign company desirous of business set up in India has multiple options to enter India and operate its business activity. One such option is to set up a branch office.

This article will discuss branch office registration in India, the procedure involved, documentation required, and time is taken in the entire procedure.

  

What is a Branch Office? 

A branch office can be defined as an extension of the head office of a corporate house. It is a business model for establishing a temporary office in India usually taken up by foreign companies that want to learn more about the Indian market without making long-term investments or commitments. The activities undertaken by a branch office is similar to those of its parent company.

Establishing a branch office in India by foreign entities is regulated in Section 6(6) of the Foreign Exchange Management Act, 1999, read with 1Notification No. FEMA 22(R)/2016-RB dated March 31, 2016.

Branch Office registration in India is subject to prior approval of the Reserve Bank of India and fulfillment of the following conditions by the parent company-

1. The applicant parent company must be incorporated outside the Indian Territory.
2. The company must be engaged in activities like trading or manufacturing etc.
3. The company’s net worth or business in its home country should not be less than US $100,000.
4. In case the financial criteria are not met by the parent company. It must issue a Letter of Comfort (LOC) from the ultimate parent company/Group company subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.
5. The parent company should have a continuous track record of profit for five years in the home country.
6. Also, the name of the parent company and the branch office in India must be exact. The parent company is liable to meet the expenses of the branch office in case it does not generate apt revenue through its operations in India.

Permissible activities to be undertaken by Branch Office:

As per RBI guidelines, the branch office can do only the following prescribed activities:

1. Import and export of goods
2. Research and development work
3. Buying and selling agent representative of the parent company
4. Consultancy services
5. Rendering any professional services

Registration of branch office in India for carrying out manufacturing activities directly is not permissible unless the manufacturing work is carried on in a Special Economic Zone (SEZ). The purpose behind this is to export products outside India. However, the branch office can sub-contract an Indian manufacturer for manufacturing any products.

The procedure of registration of branch office in India 

The following steps must be taken for registering a branch office in India by its parent company-

1. Non-Resident entities desirous of registering Branch Office in India may apply form FNC to designated AD category-1 bank along with prescribed documents in case the principal business of the foreign company falls under any sector where 100% Foreign Direct Investment (FDI) is permissible through automatic route. In other sectors, i.e. where the automatic approval route is unavailable, the application needs to be filed with the Ministry of Finance and relevant documents.
   
2. On receipt of such application and documents, the AD banker would exercise his due diligence and, in case all conditions are satisfied, grant approval for setting up a branch office in India.
3. For establishing more than one branch office across India, the parent company must seek approval from RBI for each location separately.
4. Approval from RBI for every additional business activity undertaken by the branch office is also required.
5. Once approval is granted, the Branch office need to be opened within six months. Otherwise, the approval will lapse.
6. For opening BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities, general permission has been given to non-resident companies, subject to fulfilment of prescribed conditions.

Registration with police authorities

In case, parent company desirous of opening BO in India is from certain prescribed countries, they have to register with the state police authorities.

Prescribed countries are as under:

Sri Lanka, Bangladesh, China, Iran, Pakistan, Afghanistan, Hong Kong, Macau.

Also, the AD banker must submit an approval letter for countries above to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record. Company Registration in India

Documents required for Registration of Branch Office in India:

1. Form FNC duly signed by an Authorized Representative (AR).
2. Incorporation certificate, MOA, AOA of the parent company duly attested by a notary public or by the Indian Embassy in its registration country.
3. Information and details about the company duly attested by the notary public or the Indian Embassy in its home country.
4. Audited financial statements of the parent company for the last five years
5. Documents of incorporation of the Branch office
6. Proof of a registered office
7. Note on the proposed activity to be carried on by the branch office.
8. A board resolution for opening the branch office
9. KYC of authorized signatory
10. Information regarding the local representatives hired by the parent company.

Time Involved in the entire process

It takes upto 50 to 60 working days to get branch office registration approval from the date of submission of all the documents.

Faceless Assessment under Income Tax- A welcome step in Indian Judiciary

One of the main focus areas of the Modi Government right from inception has been tax reforms in the country and to make it more transparent.

From Goods and Services Tax (GST) Bill to the technological advancements in the Income Tax Assessment procedures, the government is not leaving a single stone unturned. Every tax reform that has been made is in line with the “Ease of Doing business in India”, Digital India Initiative”, Start-up India project and with an intention to boost the confidence of tax payers and corporates in Indian tax system. 

In this article, we will be discussing about the faceless Income Tax assessment, one of the major steps taken to change the way of assessment procedure followed from past so many decades.

India is one the few nations that has adopted this type of system. The new faceless Assessment scheme has the following features-

Features of Income Tax Faceless Assessment Scheme

1.  It has brought an epitome shift in the assessment process by eradicating the human interface and making it paperless.
2. Centralized National e-Assessment Centre (NeAc) has been introduced which will be single point of contact between the tax payers and assessing officers for issuance of all the Income Tax notices, communications and smooth conduct of faceless Income Tax Assessment and passing of final income tax assessment order.
3. The scrutiny cases are transferred to assessment units through an automated procedure and randomly by computer algorithms.
4. The National e-Assessment Centre (NeAC) issues the assessment notice electronically to the taxpayer through their e-filling account. Therefore, the identity of the assessing officer is also not disclosed.
5.  It follows an approach that is team-based and makes use of technology.

Some Advantages of faceless income tax assessment are as under:

1. It provides automation and uniformity to entire procedure of Income Tax assessment.
2.  Since it involves team of tax officials, its introduction has removed all the unwanted and unnecessary procedures that could lead to subjective judgments and also individual biases.
3. The uniformity in the assessment process has helped in achieving a corruption-free, justified and truthful assessment order for the taxpayer.
4. It has become time bound
5. No physical interaction with the tax officials are required which will reduce the corruption as well as harassment of honest tax payers.
6.  It reinforces the trust of tax payers in tax officials and entire tax assessment procedure.
   

In addition to above, a revised Form 26AS has been notified by the Ministry of Finance, where all the additional details of the financial transactions of higher value done by a taxpayer during a financial year can be filed. It contains details like property purchases, any cash deposits and withdrawals made by the assessee. The Form 26AS will help, in facilitating the required data to the tax department during the primary phase of the income tax faceless assessment.

The process of the faceless income tax assessment is carried forward in the following way-

1. The NeAC which is the central cell serves a notice to the assessee. It is to be specified in the notices as to why their case has been selected for assessment.
2. The taxpayer has to provide with a response to the notice served to them within 15 days of receiving the notice through the IncomeTax Return e-filing portal.
3. Through an automated procedure the assessment case is allocated to one of the assessment centre.
4.  If there are any prejudicial modifications in the income tax returns of the taxpayer, NeAC provides with an opportunity of being heard to the assessee. The taxpayer can provide suitable documents in support of their explanations before a conclusion is made in the case.
5. The taxpayer can also request for a video conferencing facility to put forward their points.
6. Once the faceless income tax assessment is completed, a draft order is issued and the electronic records are transferred to the Authorized jurisdictional tax office. All further proceeding regarding any imposed penalty or fine, demand recovery, prosecution proceedings are to be done by the tax officer.
   
7. Once the proceedings are done, a best judgment assessment order is to be provided to the taxpayer or assessee.
   

Various Options for Foreign Companies to Setup Business in India?

 

Indian economy is one of the fastest-growing economies in the world. It is considered one of the major driving forces of the global economic market. It is the 6th highest growing international economy. Even though India is still a developing nation, it has a vast impact on trading worldwide. Many developed countries have expanded their relations with India, and many more developed nations are keen on making ties with us. 

 

The major factors that have driven foreigners for setting up businesses in India are:-

1.      Large population and a massive base consumer market.

2.      The Indian economy has shown stable and steady growth in recent years. Its ranking on the Global Competitiveness Index by the World Economic Forum is exceptionally high. This high macroeconomic stability ranking has opened the foreign corridors for business setup in India.

3.      The Indian taxation system is very comprehensive due to its treaties or agreements with other countries, enhancing the ease of doing business in India.

4.      The financial system in India is well developed and well connected to the leading markets. It is properly regularized by the Reserve Bank of India, diminishing the chances of any fraudulent activity.

5.      The friendly Indian business laws and procedures make it easier for international investors for setting up businesses in India.

Some of the laws that have eased the laws for business setup are:-

a) Goods and Services Tax Regulations including the GST, CGST, SGST and IGST.

b) Companies Bill.

c) Land Acquisition Bill.

6. There are many possibilities for lower operational costs during business setup in India, from infrastructural costs to cheap labour, inexpensive internet, etc. The tax strategies in India are quite moderate in comparison to other countries. These factors can cut the cost of business operations. Foreign Company Registration in India

7. Startup India Initiative, introduced by the Government of India, is a major reform to encourage foreigners to invest in the country and enhance the business culture. This initiative is in alignment with the parameters of Ease of Doing Business of the World Bank. It will help India to improve its ranking on this index.

8. The Government of India undertakes various initiatives to boost Foreign Direct Investment (FDI) across various sectors. The attempts to ease the rules and regulations regarding FDIs could boost foreign companies setting up business in India.

9. India has a vast trading network that can help foreigners in company incorporation in India.

10. Digitalization in the country has made it more competitive and a powerhouse of modern technology.

How Foreign Investors can set up Business in India:-

Any foreign investors can set up business in India in one of the following manners:

The first option to set up business in India is in the form of an Indian Company:-

1.      Joint Venture: In this, two or more parties agree on pooling their resources to achieve a specific target or project.

2.      Wholly-owned Subsidiary: It is the most popular form of business set up in India in which the parent company completely owns the shares.

3.      Public Limited Company: Here, a minimum of 7 members and up to unlimited members are required. It has limited liability and can offer its share to the general public.

4.      Private Limited Company: Here, a minimum of 2 members and up to 200 members are required to set up a private company. It is a privately owned company.

Another option to set up business in India is in the form of a Foreign Company:-

1.      The branch office undertakes functions like import, export, consultancy, professional services, research and development, services related to information and technology, shipping, product supply support, and representation of the parent company. To open a branch office in India, the parent company requires a minimum of five years of profit records in its home country and a net worth of more than $100,000.

2.      Project office that commences activities as mentioned in the contract of the project. It cannot render any activity other than the ones related and incidental to the project execution. No eligibility requirements are compulsory for the parent company to open a project office in India. Company Registration in India

3.      Liaison office of the parent company. It is prohibited from commencing any commercial activity or earning any income in India. It acts as a communication channel between the head office of the parent company and other business entities all over India. To open a liaison office in India, the parent company requires a minimum of three years of profit records in its home country and a net worth of more than $50,000.

4.      Limited Liability Partnership (LLP) regulated by the LLP Act, 2008. It is a form of company registration in which the partners have limited liability.