The source rule for taxing fees for technical services would not apply under the Pakistan-China tax treaty.
By H. P. Ranina/NRI Column
Published: Sun 15 Nov 2015, 11:00 PM
Last updated: Mon 16 Nov 2015, 10:00 AM
I am working for a multinational group, which has set up companies in China and India. The Indian company will be manufacturing goods in India and the Chinese company will provide supporting services by way of product development, market research, review of quality systems, interaction with vendors, etc. The Indian company will be paying a fee to the Chinese company, which will render such services. I want to know whether tax will be required to be deducted at source by the Indian company when it pays the fees to the Chinese company.
L.K. Thapar, Dubai
To answer this question, it is necessary to refer to the provisions of the India-China Double Tax Avoidance Agreement. Under Article 12(4) of the Agreement, technical service includes 'provision of services'. This expression will cover services, even if these are not rendered in India by the Chinese company. Since the Chinese company will be providing information on new developments with regard to products, technology, etc, the services would fall within the definition of 'consultancy services'. The Chinese company would also be conducting market research to identify new products. In similar circumstances, courts in India have held that the fees payable would be liable to tax as they would be treated as fees for technical services.
Courts have also referred to the Pakistan-China tax treaty, in which case the expression used is 'provision for rendering of services'. In such a case, the fees would not be taxable if the services are rendered in one country and payment is made by an entity of the other country. In other words, the source rule for taxing fees for technical services would not apply under the Pakistan-China tax treaty. On the other hand, under the India-China tax treaty, since the wider expression 'provision for services' is used, the source rule would be attracted and the fees would become taxable. Therefore, in the case of your group companies, tax would be deductible at source when fees are paid to the Chinese company under Article 12(4) of the India-China tax treaty. On similar facts, the Authority for Advance Rulings has ruled that tax is deductible at source.
There are several tax defaulters in India on whom demands have been raised but the tax recovery has not taken place. If the government were to recover the tax, the deficit would come down or more money could be spent on developing social infrastructure. Are any measures proposed to tone up the administration?
S.K. Mukherjee, Doha
The tax administration is being galvanised to recover dues which have crystallised; attempts are also being made to widen the tax base. The government has recently come up with guidelines for grant of rewards to informants where the tax is recovered based on information provided. Under these guidelines, reward up to 10 per cent of the tax recovered would be given to those who provide credible information on defaulters on whom tax demand has already been raised but the taxes have remained outstanding on account of their assets being untraceable. In some cases, the tax defaulters cannot be traced.
The rewards will be given only after all litigation has come to an end and the tax is actually recovered. The maximum amount of reward has been fixed currently at a figure of Rs1.5 million. However, this can be relaxed by a committee comprising of senior tax officials. It is further provided that the reward claim cannot be disputed by the informant in any court.
My mother who is a senior citizen is residing in India. She has substantial income from rents. However, she is suffering from cancer and incurring substantial amount on medical expenses. Are such expenses deductible from her taxable income? I am not sure, but some people have advised me that they are.
B.K. Parekh, Sharjah
The full medical expenditure will not be deductible. However, for persons who are resident in India, expenditure on medical treatment in respect of certain ailments or diseases is allowed to be deducted under section 80-DDB of the Income-tax Act up to Rs40,000 per annum. In the case of a senior citizen, that is a person who is more than 60 but less than 80 years old, the deduction is up to Rs60,000 per annum. For a person who is more than 80 years old, the deduction allowed is up to Rs80,000 per annum. The illnesses covered are listed in Rule 11-DD of the Income-tax Rules, 1962, which include malignant cancers, chronic renal failure, hematological disorders, etc.
In order to claim the deduction, your mother will have to furnish a certificate in the prescribed form from an oncologist. Earlier, it was necessary to obtain a certificate from an oncologist working in a government hospital. This rule has now been waived; any qualified oncologist can give a certificate, based on which the deduction under section 80-DDB can be claimed.
I had returned to India after living in Abu Dhabi for more than two decades. I arrived in March 2014 and I planned to return this year. However, this has not happened. I have income from FCNR and NRE deposits. These deposits are maturing in 2017. During financial year ended March 31, 2015, I earned Rs2 lakhs from NRE deposits. Would I be required to pay any tax for the assessment year 2015-16 and how long can I retain these deposits?
Dr R. Shet
Upon returning to India, the FCNR/NRE deposits would need to be converted to Resident Foreign Currency account deposits or Indian rupee deposits. Perhaps, you did not do so as you were not sure whether you would stay in India for good or become non-resident again. Since you have not returned so far, it is better to take action immediately and not wait till 2017 when these deposits mature.
Interest on FCNR and NRE deposits is exempt from tax under section 10(4)(ii) of the Income-tax Act only in the case of a person who is resident outside India under the Foreign Exchange Management Act. Since you have no employment or vocational engagements in the Gulf after you returned to India in March 2014, you have become resident in India under FEMA. Hence, the interest would not be exempt from tax under section 10(4). However, since your total taxable income in India is only around Rs.200,000, you are within the initial exemption limit. Therefore, no return of income needs to be filed for the assessment year 2015-16.
The writer is a practising lawyer specialising in tax and exchange management laws of India.
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