No tax cut if NRI doesn't earn an income in India

Dubai - If no part of the income earned by the NRI is liable to tax in India, the question of deducting tax will not arise.

Q: I have been appointed as a commission agent by an Indian company which exports garments to the Gulf. My work is to canvass for orders in this part of the world. I will be paid a commission based on the value of orders executed. Will I be liable to pay tax in India on the commission paid to me by the Indian exporter and will they have to deduct tax at source while remitting the commission to me?

A: Under your agreement with the Indian exporter, you are required to canvass for orders only in the Gulf. Therefore, you render no service in India. Further, it is assumed that you are not having any fixed place of business in India. Hence, both under the Income-tax Act and under the Indo-UAE Double Tax Avoidance Agreement, you earn no income in India as you have no permanent establishment and are carrying out no operations there.

Section 195 of the Income-tax Act requires an Indian company to deduct tax at source while making payment to a non-resident only from income which is chargeable in India. In other words, if no part of the income earned by the non-resident is liable to tax in India, the question of deducting tax at source will not arise. Further, no prior approval or certificate is needed from the tax authorities for remitting the full amount of commission you earn.

Q: I have inherited a property from my grandmother. However, the will mentioned that 25 per cent of the property would belong to my sister. After negotiations, I paid off my sister the value of her share in the property. I am now planning to sell the property as it is entirely in my name. I want to know on what amount of capital gains will I be liable to pay tax. Can I claim the amount paid to my sister as a deduction?

A: Since you have inherited the property from your grandmother, the cost of acquisition would be the price at which your grandmother had purchased it. However, if she had purchased the property prior to April 1, 2001, you can determine the fair market value of the property on that date and treat that as the cost of acquisition since it is bound to be higher than the price at which your grandmother had purchased the property.

The amount which you have paid to your sister in respect of her share will be treated as part of the cost of acquisition. This is in view of a decision of the Calcutta High Court which has held that such sum paid is for discharge of an encumbrance. The amount so determined will be indexed by the fraction 280/100, assuming that you sell the property before March 31, 2019. You will be entitled to claim legal expenses, brokerage and any other expenditure incurred in transferring the property as a deduction from the capital gains.

Q: I had purchased an old property in 2007 for about Rs100 million. The old property which was occasionally used by me for residence as and when I visited India has now been demolished and a new building will be constructed for residential purposes. My existing residential apartment in India has been sold this year and I would like to use part of the capital gains for constructing the building on the land which I had purchased in 2007 as such land is now open after demolition of the old structure. Will the capital gains exempt from tax cover only the cost of the new building to be constructed or also the cost of the land purchased in 2007 with the old structure?

A: Under section 54 of the Income-tax Act, capital gains are exempt if they are invested in purchasing a new residential property within two years or constructing a new property within three years from the date of sale of the old property. Therefore, if the capital gains made in respect of the residential apartment which you have sold this year are less than the cost of the new residential property constructed within three years, the entire amount of the capital gains will be exempt from tax.

In a recent decision, the Madras High Court has held that the cost of land would be treated as part of the cost of the residential house. The court has emphasised the fact that the cost of the new residential house includes cost of the land on which the structure is erected, as well as the cost of materials used in construction, the cost of labour and other expenses incurred for bringing the new residential property into existence.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.