Receipt of any income would attract tax liability

monday | september 19, 2016

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Q: My family runs an industrial unit in Karnataka. They have earned carbon credits. Would they be liable to pay tax on the value of these carbon credits? Since advance tax is payable shortly, I need your clarification.

- S Nagaraj, Dubai

A: Carbon credit is in the nature of an incentive given to protect the environment by reducing carbon, heat and gas emissions. It is made available as an entitlement with transferable rights. Therefore, such amount earned from carbon credits cannot be treated as business income. The credits are given to businessmen all over the world under the Kyoto Protocol.

Courts have, therefore, held that transferable carbon credits cannot be treated as business income but have to be treated as a capital receipt which does not fall in the definition of income. The amount earned on sale of these transferable rights is not related to producing or selling any product, bi-product, or for rendering any service in the nature of business. While filing your tax return, the amount received on sale of the carbon credits should be separately shown as a capital receipt in order to ensure that full disclosure is made.

Q: I have been receiving my salary directly in my bank account. I have now opened a Non Resident (External) Account in India. Would it be advisable for me to instruct my company to credit my monthly salary to this bank account instead of my present account in my local bank?

- B C Rajput, Abu Dhabi

A: If the salary is credited by your company directly to your Non Resident (External) bank account, it may be deemed to be received in India. Therefore, though you are non-resident under the Indian tax law, the receipt of any income in India would attract tax liability.

Courts in India have taken conflicting views on this issue; some have taken the view that no amount is taxable in India since the salary is earned outside India, while others have taken the view that since the income is received in India, it is taxable under section 5 of the Income-tax Act. It would therefore be advisable to continue receiving your salary in your existing bank account in Abu Dhabi. Thereafter, you may transfer such amount as you wish to your Non Resident (External) account in India.

Q: Is it true that foreigners may now be permitted to reside in India for a long period of time? I have a German friend who wants to set up a medium scale engineering industry and wishes to take advantage of the huge demand potential in India.

-R Shaikh, Abu Dhabi

A: The Indian Government has approved in principle a scheme to permit foreigners to secure permanent residency status. Initially, it would be permitted for 10 years which would be renewable for another ten years. The benefit can be availed of by foreigners who invest a minimum amount of Rs100 million within the initial 18 months. Such persons will be allowed to purchase residential property for their own occupation.

The investor would have to employ at least 20 persons in his business. The investor's spouse and children will be eligible to take up employment and attend educational institutions without having to obtain a separate employment or student visa. Such persons would not be required to register themselves with the Foreigners Registration Office.

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