By Nishant Thakkar
Under the Income-tax Act, 1961 (Act) , gains earned from transfer of all foreign assets are taxable for residents in India. For non-residents, only assets situated in India or those deriving more than 50% of their value from assets in India are taxable. India has also entered into agreements with several countries to divide taxing rights [Double Tax Avoidance Agreements (DTAA)]. In cases where India has entered into such agreements, the taxing rights are governed by their provisions.
While DTAA provisions are usually invoked by non-residents, in some cases even residents can take shelter under DTAA – for instance, if a resident of India acquires a villa in Austria, gains from its sale may be exempted from tax in India under the DTAA.
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Taxable foreign assets
Gains derived from the transfer of any capital asset is ordinarily the excess of “full value of consideration” (FVC) over the “cost of acquisition” (COA). For short-term capital assets, the gain is subject to taxation at the applicable normal rate, such as the slab rates for individuals. On the other hand, for long-term capital assets, it is generally taxable at a base rate of 20%. However, these rates are subject to any beneficial rates provided under the DTAA.
Exemption on reinvestment
The Act grants exemption on reinvestment of long-term capital gains obtained from the transfer of a foreign asset. Exemption eligibility depends on the type of asset sold and the nature and extent of reinvestment. For instance, if an individual reinvests the entire gains arising from the transfer of shares of a foreign firm (a long-term capital asset) in acquiring a residential house in India, the gains (subject to conditions contained in the relevant section) will be exempt from taxation in India.
An area of concern arises due to the subjective nature of determining the COA and FVC. Typically, when an acquisition or sale takes place, the amount paid or received is treated as COA or FVC. However, in certain cases, the Act requires the determination of fair market value (FMV) to be treated as the COA or FVC.
The issue of valuation becomes even more relevant when the transaction is between related parties. Valuation is subjective and can be challenged by the I-T department.
Disclose foreign assets
Under the Act, it is mandatory for all residents to disclose their foreign assets in the income tax return filed in India. However, there is no similar requirement for non-residents. Nonetheless, it is advisable for non-residents to file tax returns in India whenever they purchase or sell a foreign asset, from or to a resident of India or acquire or transfer assets that derive their value from underlying assets in India.
The purchaser of a foreign asset, particularly non-residents dealing with residents of India or acquiring assets that derive their value from underlying assets in India, may have an obligation to deduct tax at source. It would be advisable for the purchaser to obtain a certificate from the I-T authorities to quantify their withholding obligation and ensure compliance with regulations.
TAX GAINS
For short-term capital assets, gains are subject to taxation at the applicable normal rate
For long-term capital assets, gains are taxable at a base rate of 20%. Rates are subject to DTAA provisions
(The author is partner, Lumiere Law Partners)
