Indian government relaxes FDI norms for construction, realty sector

Foreign direct investment is now permitted in each phase of construction.

I want to get into real estate development business in India with some friends. I have been told that the Indian government has allowed foreign direct investments by liberalising the existing norms. Some sketchy details are available but I want to know the core issues. - K.C. Advani, Dubai
For non-resident Indians, the lock-in period has been removed and they can exit any time. For others, the exit is allowed if the project is completed before the lock-in period expires. Foreign direct investment is now permitted in each phase of construction. A phase is considered to be a separate project. Under the new policy, any project under construction can have access to foreign direct investment regardless of the size of the project. Earlier, the minimum size was pegged at 20,000 square metres.
There was also a restriction earlier that atleast $5 million should be brought into India within six months of commencement of the real estate development project. This has now been removed. However, foreign direct investment will not be permitted for trading in land or transferable development rights or for construction of farm houses.
I have got an assignment as liaison agent of an Indian company. I will be receiving professional fees for the assignment. The Indian company has put a clause that they will deduct tax at source before my fees are remitted. I want to know whether my fees are taxable in India. -R.K. Mahajan, Abu Dhabi
Merely because there is a clause in your agreement that tax will be deductible at source when your fees are paid, would not by itself make your fees liable to tax in India. It is necessary to consider the provisions of the Income-tax Act as well as the double tax avoidance agreement between India and the UAE. Under section 9(1)(vii) of the Income-tax Act, managerial, technical or consultancy services fall within the definition of 'fees for technical services'. Consultancy services are in the nature of advisory services provided by the non-resident. Since your services are to be rendered as a liaison agent, such services would not fall within the definition of 'advisory or consultancy services'.
The Delhi High Court has held that where a non-resident is acting as a link between the Indian party and the customer facilitating a transaction, there would be no services in the nature of advisory services. Liaising activities have been held to be outside the purview of section 9(1)(vii) of the Act. According to the court, such services would fall under Article 22 of the Indo-UAE Double Tax Avoidance Agreement and, therefore, such income would only be taxed in your hands in the UAE, unless you have an office or branch in India which would be treated as a permanent establishment. Hence, no tax would be deductible at source despite the enabling provision in your agreement. The Indian company can obtain a ruling from the Authority for Advance Rulings if it has any doubt on the issue of withholding tax.
My father who is based in India has been investing in the capital market. In the financial year 2012-13, he had bought and sold shares and securities through the stock exchange by investing his own funds. The tax officer has taken the view that the profits made by him should be taxed as business income and not as capital gains, thereby rejecting his tax return. I need your expert advice on the question whether my father was right in treating the profits as capital gains. -T.S. Raman, Doha
If your father has been maintaining books of account and treating the shares and securities purchased by him as investments, the profits would be treated as capital gains, especially if the transactions were delivery based. A trading activity would be deemed to have taken place if there are repetitive transactions in shares of the same company. Merely because there are several transactions in shares of different companies would not lead to the conclusion that your father is undertaking a trading activity.
The Central Board of Direct Taxes had also issued a circular in August 1989 and many courts have taken the view that gains arising from purchase and sale of shares would be taxable under the head 'Capital Gains' and not as business income. Section 28 of the Income-tax Act which deals with business income would only apply in respect of profits made on sale of shares and securities which were held as stock-in-trade. On the other hand, securities held as investments would be treated as capital assets and the profits would be taxable under the head 'Capital Gains' under section 45 of the Act. If the shares were held for more than one year, the capital gains arising on transfer of these shares would be exempt where the shares are sold through the stock exchange and the securities transaction tax has been paid.
The finance minister had promised to streamline the tax administration with a view to reduce tax payer harassment. Have any steps been taken so far in this direction? -J. Colaco, Ruwi
The Central Board of Direct Taxes has recently issued directions that any inquiry should be made by sending e-mails or letters and replies received from the tax payer should be acted upon. The objective is to avoid visits of tax payers to the offices of the Income-tax Department. Assessment orders will also be reviewed by a committee of senior officials to ensure that high pitched assessments are not made with the sole objective of recovering tax. Peer review of assessment orders has been recommended by the Tax Administration Reforms Committee and this has been acted upon by the CBDT.
The writer is a practicing lawyer specialising in tax and exchange management laws of India.

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