Lottery earnings are taxed at maximum marginal rate in India

Photo used for illustrative purpose only

Q:  A recent news report in Khaleej Times relates to an Indian mason, Yadav, who won a lottery prize of Dh1 million. Yadav indicated that he proposed to return to India for good this month to start his own business. He started his job in the UAE in July 2012. What would be the tax implications pertaining to the large amount he has earned in the UAE?
- Varma, Dubai
A: If Yadav returns to India this month, he will be liable to pay tax in India on the windfall amount of approximately Rs18 million at the rate of 30 per cent, plus 15 per cent surcharge on the tax and three per cent education cess on the total of the tax and surcharge. Earnings from lotteries, betting, etc., are taxed at the maximum marginal rate of income tax. The right time to return to India for good would depend on certain facts.
If Yadav has spent less than 365 days in India during the four preceding financial years, viz 2012-13, 2013-14, 2014-15 and 2015-16, he may return to India in October this year. However, if he has spent 365 days or more in India during these four financial years, he should be in India for less than 60 days during the current financial year 2016-17. In this case, he should return to India in February/ March 2017 and not earlier. This will ensure that he continues to be non-resident for the financial year 2016-17 and not liable to pay tax in India on the amount and the salary earned during this year.

Q: My wife who works in India has been advised to invest a part of her income in the National Pension Scheme. I want to know whether she can continue to invest in the scheme even after she retires. If she nominates my son under the scheme, will he be liable to pay tax on the amount received by him upon the death of my wife?
- R.C. Bindra, Sharjah
A: If your wife has taxable income in India, she will be entitled to claim a deduction under section 80-CCD of the Income-tax Act upto Rs50,000 in every financial year in addition to the deduction of Rs150,000 under section 80-C if she has contributed to provident fund or paid life insurance premium.  Even after retirement, she can continue to contribute to the National Pension Scheme (NPS). This can be done up to the age of 70 years.
In order to do so, your wife will have to write to the National Pension Scheme Trust or any intermediary through whom she has subscribed at least 15 days before turning 60 or before retiring. She will have to pay the usual charges to the central record keeping agency and the trustee bank.  Withdrawals from the NPS on maturity are tax-free up to 40 per cent of the total corpus accumulated. When the amount is received by your son as nominee after your wife's death, such amount will not be treated as taxable income.

Q: An American company for whom I work in the Gulf has been selling pre-packaged software to Indian clients. The persons who purchase the product are deducting tax at source while paying the price of such software to the American company. Some advisers have told the American company that there is no need for withholding tax as no royalty is paid by the Indian customers. I want to know the correct legal position.
- K.L. Sajnani, Doha
A: There has been litigation on this issue. Courts have generally taken the view that royalty as defined under the Indo-US Double Tax Avoidance Agreement (DTAA) means consideration paid for transfer of all or any rights in respect of a copyright. Therefore, the licensee who pays the royalty must obtain all or any of the copyrights of a literary, artistic or scientific work. Hence, the courts have made a distinction between acquisition of a copyright and a copyrighted product. A copyrighted product embedded in a computer programme cannot be equated with rights, including granting of licence, in respect of a copyright.
Therefore, when consideration is paid for transfer of copyrighted articles, it cannot be said that any royalty has been paid as defined under the Indo-US DTAA. Consequently, it has been held that where the object of the transaction is to restrict use of the copyrighted product for business purposes, it would not amount to giving a right to the licensee to use the copyright. Hence, no tax is liable to be deducted at source where the consideration is paid for using a copyrighted product. Since the tax department is not accepting this view, the litigation will end only when the Supreme Court gives its verdict.

Q: I have been trading in units of mutual funds. In the current year, I have made some losses which I wish to set off against profits from trading in shares. Will I be permitted to set off such loss against profits? My tax consultant feels this may not be allowed by the income-tax department as the loss pertaining to the units may be treated as arising from speculative transactions.
- C.R. Joshi, Dubai
A: A speculative transaction is defined by section 43(5) of the Income-tax Act to mean a transaction in which a contract for the purchase or sale of any stocks and shares is settled otherwise than by actual delivery. The Supreme Court has held that units of mutual funds do not fall within the meaning of the word 'shares'. Therefore, the provisions of section 73 which stipulate that losses from a speculation business can only be set off against profits of another speculation business would not be applicable.
In short, the losses in transactions of mutual fund units would be treated as a business loss, and not as a speculation loss. Thus, such loss can be set off not only against profits of the same business or another business, but can also be set off against income taxable under any other head, including property income or investment income.

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 policies.

• India