The Hindu Business Line article - Disclosure initiative with a twist

The Finance Bill, 2012, requires all residents to provide information on foreign assets for taxation, and this includes dividends.

Anubhav Sharma, a US resident, returned to India from USA after a fairly long stint of employment. He stayed abroad for approximately 10 years, and while he was in the US, he invested in mutual funds and shares via a brokerage account. The dividends were reinvested, and taxes were paid as necessary in the US, as he filed a resident US return. Anubhav returned to India a few years ago when he was deputed by his company to oversee their India operations, and he has been working here ever since. Anubhav didn't redeem funds in his brokerage account, and the account continues to yield dividends on his investments, though no fresh investment was made post his return to India.

Anubhav has filed his India tax returns as a resident, since he surrendered his green card. He hasn't reported these dividends on his India return, as dividends are exempt from tax in India, and he assumed that this rule would apply to foreign dividends as well. Anubhav recently came across an article which explained in detail the provisions of the Finance Bill 2012 with reference to assets held abroad.

NEW TAX RULES

Though the Bill is yet to be passed in Parliament, the CBDT (Central Board of Direct Taxes) has already notified the new tax forms for this fiscal. The new rules require all residents, including those who aren't ordinarily resident, to provide information on overseas assets owned by them.

Having filed resident returns in USA, Anubhav is quite familiar with the provisions of the Banking Secrecy Act and the FBAR — Foreign Bank Account Reporting in USA which requires all US citizens and resident return filers to disclose all foreign financial assets in excess of $10,000. In fact, 2011 onwards, US requirements have become more stringent in that all citizens must now also file an additional form along with the US tax return, which not only discloses the assets abroad, but also lists the income earned from these assets and the schedule of the tax return on which the said income is listed. There is, of course, a threshold limit for the disclosure. So now, the disclosure ties to the tax return and makes sure that foreign income doesn't escape the tax net.

The Indian government has now embarked on a similar initiative. All resident filers (including those who aren't ordinarily resident) must declare details of bank accounts, financial interest in any entity, immovable property, as well as any foreign account for which they have signature authority. So far, it seems to only be a disclosure or information-reporting requirement. While this move may seem stringent, especially to expats whose status isn't ordinarily resident, one must analyse the move from a wider perspective.

TAXABILITY OF DIVIDENDS

This move is an effort to curb black money and widen the tax net. On the face of it, expats may claim that the rule is hard on them, since they aren't permanent residents of India. However, it must be noted that the US disclosure rules are also similar — one may not be a permanent resident or citizen but if one files a resident tax return, then one falls under the purview of the disclosure rules. In this light, Anubhav will need to show his foreign assets, namely the brokerage account, and he may need to consider taxability of dividends based on the Double Taxation Avoidance Agreement.

The Finance Bill isn't through yet, but another one of its related provisions also states that tax assessments may be reopened for the previous 16 years, in case any concealment is detected. There is ambiguity in this, since the normal statute of limitations requires that income tax records be maintained by taxpayers for a period of six years only. A similar conflict also arose in the US disclosure programme. The statute of limitations in USA is 3 years, so any adjustments to taxes prior to that period need taxpayer concurrence.

The last Offshore Voluntary Disclosure initiative programme in the US covered a period of eight years from 2003 to 2010. The conflict due to the statute of limitations was simply resolved by getting taxpayers to sign an agreement to reopen assessments for the whole 8-year period, in return for a reduced penalty framework. One can only guess that something along similar lines is being contemplated in the Indian scenario as well.

According to the finance ministry, the provisions are aimed at residents whose global income must be taxed in India, but there is still some ambiguity, and the CBDT may need to be very explicit regarding the qualifying conditions and threshold limits which will be used to determine if someone falls under the purview of these rules.

(The author is a Coimbatore-based chartered accountant.)

http://www.thehindubusinessline.com/features/mentor/article3311677.ece

Business Line : Features / Mentor : Where there is a will…

Business Line : Features / Mentor : Where there is a will…

A will has legal acceptance, even if it is written plainly on white paper with no formal style, with just two witnesses.

March 18, 2012:  

It was during the recent visit to USA, that I came across a shocking situation. A middle-aged couple from Gujarat, who were relatives of my client, had recently passed away in a tragic car crash.

They had moved from India and settled in USA almost a decade ago for a software job, and both of their children are natural US-born citizens. The grandparents hurried to USA and took care of all formalities, including the funeral and last rites.

When the time came to claim the children and arrange for them to return to India, they were in for a shock — the US Government had placed the kids in foster care already.

Further enquiries revealed that only a court of law could decide if the children remained in foster care or went with the grandparents, because the parents hadn't written a will designating a guardian for the children, in the event of something happening to both of them.

The fact that the children lost both their parents in a horrifying accident was tragic enough, but making the matter worse was the fact that the parents died intestate, and thus, the custody of the children became an issue for the courts to decide.

Yes, sadly enough, if a person dies intestate in USA, and has young children, and the remaining parent is also deceased or unavailable, the courts will determine who gets custody of the children.

What a tragic situation for the children to be in! Coping with losing both parents is bad enough, without the added trauma of settling into a foster home and adjusting to an alien culture until the court can make up its mind on where they should go, and who should care for them.

LEGAL DECLARATION

Undoubtedly, social systems differ from country to country. Foster care is a common procedure in USA, but alien to Indian culture. While we aren't judging the correctness of foreign social rules, one cannot help thinking that a simple thing like a will could have made a lot of difference to those kids. Eventually, the court did grant the grandparents' custody of those children, with the intervention of the Indian Embassy, but a will could have prevented a long wait, and astronomical legal expenses.

A will is a simple enough legal declaration, by which a person provides for the transfer of his/her property at death. Perhaps, because of its association with death, it is a document that most people postpone drawing up, especially in India.

Due to its association with death, it is considered inauspicious. However, not drawing up a will these days is more inauspicious. If someone dies intestate in India, something as simple as transfer of a phone line or an LPG connection requires that the nominee prove he/she is a legal heir of the deceased in addition to getting letters from the remaining legal heirs. People also desist from discussing this issue with their parents, in view of their sentiments and the inauspicious tag attached to a will.

ASSETS FOR THE FUTURE

Unless the older generation, for some reason, seeks professional advice and comes across a professional consultant who provides the right advice, they don't foresee such issues, and are, therefore, blissfully ignorant of them. In their belief that they are leaving assets for their children, and that they have provided for the prosperity of the family, they unknowingly leave behind many a legal tangle. A will has the legal acceptance, even if the Testator (who writes the will) writes on a white paper with no formal style, with two witnesses, and which is ambulatory & revocable during his lifetime to accommodate change of events such as birth, marriage, divorce, family chemistry, wealth variation etc.

‘Where there is a will there is a way' goes an old English adage. Someone made a witticism out of it and turned it around to state ‘Where there is a will… there are many worried relatives' To top it all, however, where there is no will… there are umpteen legal hassles.

(The author is a Coimbatore-based chartered accountant.)

TDS relevance for foreign commissions

The question is if the commission payment to a non-resident is chargeable to income tax in India.

Gangesh Exports Ltd is engaged in the manufacture of precision sorting machinery for agricultural products. It sells machinery to various countries, especially developing countries, through agents in the respective countries.

These overseas agents are paid commission for effecting sales abroad. No TDS was deducted by Gangesh Exports on these commission payments, in view of the fact that the payments were made outside India, and the overseas agents are non-residents.

However, during the assessment proceedings, the Assessing officer held that the payment is not only commission for effecting sales, but also qualifies as related services rendered for sales, and hence it should have been subjected to TDS.

The Assessing officer's contention is that the said commission amount be disallowed as expenditure, and be added as income under Section 40 (a) (i) in view of non-deduction of tax on such commission payment.

Circular 23 is explicit that if an overseas agent operates in his own country, the entire commission received by him from an Indian exporter isn't liable to tax in India. However, recent withdrawal of Circular 23 provided a perception for some tax officials that such a situation would warrant withholding of tax on commission payments to overseas agents.

Though few Tribunal rulings are clear that no withholding tax is required on mere sales commission, the Revenue seems to prefer the verdict of the court in such an instance.

SECTION 195

For many of the exporters, especially of capital goods, payment of commission to overseas agents is inevitable, and the RBI has permitted payment of that without any prior approval.

The withholding provisions for foreign payments are governed by Section 195 of the Income Tax Act, which says that any person who makes payment to a non-resident has tax deduction obligations at specified rates, if the said payment is chargeable to income tax in India.

The next question that needs an answer is if the commission payment to a non-resident is chargeable to income tax in India. Taxable income of a non-resident includes all income, from whatever source derived, that is deemed to accrue or arise in India.

The income deemed to arise/accrue includes any income of any person who has business connections in India, as well as any fees received towards technical services. Also, if the overseas agent has any permanent establishment in India, it shall be included as income.

In the given situation, Gangesh exports has paid mere sales commission for effecting the sales, and there is no other activity involved in this transaction; hence, it doesn't necessitate deduction of TDS on sales commission.

PERMANENT ESTABLISHMENT

However, the situation would have been different had that overseas agent carried out additional functions, such as demonstration of the machinery, imparting initial training to the buyers team etc, in which case, it would be fees for technical services.

Such situations not only warrant the Indian exporter to withhold tax, but also to examine if the Indian exporter would be deemed to have a Permanent Establishment (PE) in the respective country. A reverse situation would depict the picture clearly, wherein a German exporter of machinery, having an agent in India, who not only sells machinery but also imparts training, would be construed as a PE in India.

The major test is if the source of income stems outside India or in India, which is determined by the nature of activities taken up by the agent, though actual payment is made outside India. Therefore, care needs to be exercised while deciding on TDS applicability and evaluating the nature of activities rendered by the overseas sales agent, though the nomenclature may be “agent”.

The current scale of industrialisation and globalisation across the globe makes it impossible for countries to remain independent of each other as far as complex international financial transactions are concerned. Tax law changes in any country influence its trade and policy decisions. Tax structures also determine inflow and outflow of investment and capital, and can inhibit or promote growth.

It is a recommended practice to get the views of your professional tax consultant whenever or wherever a question of such demarcation arises.