Taxation (Income Tax) of a Non- Resident Indian

Why is residential status of an Individual Important for Taxation?

The incidence of income tax payable by an individual in India varies according to his residential status. There are 3 categories of residential status for any Individual -

** 60 days shall be replaced by 182 days in case in case of an Indian citizen or a person of Indian Origin coming on a visit to India or in case of an Indian citizen going abroad for an employment during the previous year

Taxability for Non Resident

In respect of a Non Resident only that Income which is received or deemed to have been received in India by or on his behalf and income that accrues or arises or is deemed to accrue or arising in India is Taxable in India.  The taxability of the NRI has been explained in the diagram below:

#1 What is Business Connection in India for an Non Resident to determine the Taxable Income?

·         Business Connection or  Profession Connection includes a person

·         Who has an authority to conclude contracts on behalf of the nonresident.

·    Who does not have such authority but habitually maintains stock of goods or merchandise in India from which he regularly delivers the goods or merchandise on behalf of the non resident.

·       Who habitually secures orders (wholly or mainly ) for the non resident or for non residents under same management. – Here the words wholly or mainly are very important. This signifies that major proportion of the total activity carried out by the person should be for the non resident.

·         Following operations are not considered to be a Business Connection:-

ü  Purchase of Goods in India for the purpose of export i.e to be sent to a non resident.

ü  Collection of news & views in India for transmission out of India by a non resident engaged in the business of running a news agency or publishing news papers, magazines or journals.

ü  Shooting of any cinematograph film in India by a non resident individual who is not a citizen of India, or a firm which does not have any partner who is a citizen of India or a resident in India, or a company which does not have any shareholder who is a citizen of India or is a resident in India.

Disclaimer:

No assurance is given that the revenue authorities/courts will concur with the views expressed herein. My views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. I do not assume responsibility to update the views consequent to such changes. The views are for the general use by public at large and the author does not undertake any responsibility for the use / misuse of the same or any damage that may be caused because of such use / misuse. It is strongly recommended that before implementing any of the above options, the subject matter expert be consulted.

How to incorporate a Company in India / FORMATION OF INDIAN COMPANY ?

FORMATION OF INDIAN COMPANY

Under the provisions of the Indian Companies Act, 1956, a non-resident can form any of the following types of companies.

·         Private Limited Company

·         Public Limited Company

WHAT ARE THE PRE-REGISTRATION REQUIREMENTS TO FORM A COMPANY?

·         A Private Limited Company must have a Paid-up capital of INR 100,000 and must have a minimum of two directors and two shareholders.

·         The directors must have a valid Director Identification Number (DIN), allotted by the Ministry of Corporate Affairs. DIN is a unique identification number for an existing director or a person intending to become a director of a company. As per a recent amendment to the Companies Act 1956, DIN has become mandatory for all the directors.

·         At least one of the directors should have a valid Digital Signature Certificate issued by the Certifying Authorities (CA) and approved by the Ministry of Corporate Affairs.

WHAT ARE THE STEPS FOR ALLOTING A NAME TO YOUR COMPANY?

·         File an application for MCA’s approval of the desired name for the proposed company.

·         Application for name approval can be made online via MCA’s portal MCA 21.

·         The particulars required to complete the form :

ü  Name of the proposed company

ü  Location of registered office of the proposed company

ü  Main Objectives of the business of the company

ü  Names of Subscribers to the Memorandum of Association

ü  Proposed Authorized Share Capital of the Company

ü  DIN & DSC

LIST OF DOCUMENTS TO BE PREPARED FOR INCORPORATION?

·         After obtaining name approval from the ROC the following documents must be prepared to incorporate the company:

ü  Memorandum of Association (MOA)

ü  Articles of Association (AOA)

ü  Form 1 – providing details of promoters of the company

ü  Form 18 – providing details of registered office of the company

ü  Form 32 – providing details Directors of the company

·         Then the MOA and AOA are required to be stamped & filed with the ROC. A stamp duty is required to be paid on the MOA and on the AOA. The document preparation process may take five to seven days.

WHAT ARE THE DOCUMENTS REQUIRED TO BE SUBMITTED TO ROC?

·         The following documents are to be submitted to the ROC with the filing fee and the registration fee:

ü  The stamped and signed Memorandum and Articles of Association (3 copies).

ü  Form-1, 18 & 32 in duplicate.

ü  Any agreement referred to in the Memorandum & Articles.

ü  Any agreement proposed to be entered into with any individual for appointment as Managing or whole time Director.

ü  Declaration of Compliance by an advocate or company secretary or chartered accountant or director, manager or secretary of the company

ü  Name availability letter issued by the ROC.

ü  Power of Attorney authorizing a person, on behalf of subscribers, any documents and papers filed for registration. The power of attorney should be given on Non-Judicial stamp paper of appropriate value and shall be submitted to the Registrar

WHAT IS THE FEES CHARGED FOR PAYMENT OF REGISTRATION FEES?

·         The fees payable to the Registrar at the time of registration of a new company varies according to the authorized capital of a company proposed to be registered. Payment for the Registration and Filing Fee must be made by Demand Draft/Banker’s Cheque if it exceeds Rs.1000/.

WHEN CAN YOU COMMENCE YOUR BUSINESS?

·         The ROC will issue a Certificate of Incorporation after careful review of documents submitted. Section 34(1) cast an obligation on the Registrar to issue a Certificate of Incorporation, normally within 7 days of the receipt of documents.

·         A Private Limited Company can start its business immediately on receiving the Certificate of Incorporation.

WHAT ARE THE VARIOUS COMPLIANCES TO BE MET?

·          PAN APPLICATION

·         TAN APPLICATION

·         VAT REGISTRATION

·         SERVICE TAX REGISTRATION

·         PROFESSIONAL TAX

·         IEC REGISTRATION

·         PF,ESIC AND OTHER LABOUR LAW REGISTRATIONS

FILING OF E- FORMS WITH ROC

·         DIN-1: APPLICATION FOR ALLOTMENT OF DIRECTOR IDENTIFICATION NUMBER

·         FORM 1: APPLICATION FOR INCORPORATION OF A COMPANY

·         FORM 18: NOTICE OF SITUATION OF REGISTERED OFFICE

·         FORM 32: PARTICULARS OF APPOINTMENT OF MANAGING DIRECTOR, DIRECTORS, MANAGER AND SECRETARY AND THE CHANGES AMONG THEM OR CONSENT OF CANDIDATE TO ACT AS A MANAGING DIRECTOR OR DIRECTOR OR MANAGER OR SECRETARY OF A COMPANY AND/ OR UNDERTAKING TO TAKE AND PAY FOR QUALIFICATION SHARES

Options/Entry Strategy for Investment in India by a Forign Company/Individual/NRI

Foreign direct investment (FDI) is a direct investment in a country by an individual or company of another country for production or business, either by buying a company in the target country or by expanding operations of an existing business in that country.

India Provides Best Options and Plans for Foreign Investment, it includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company.

The fast and steadily growing economy of India in majority of its sectors, has made India one of the most famous and popular destinations in the whole world, for Foreign Direct Investment. India's ever-expanding markets, liberalization of trade policies, development in technology and telecommunication, All This Factors made India to Attract Foreign Investors, for most productive, profitable, and secure foreign investment.

Entry strategy for the Indian market

The foreign company looking to enter the Indian market may consider any of the following option for entry strategy depending upon the purpose and tenure in the Indian market.

·        Liaison Office (LO)

·        Branch Office (BO)

·        Company (may be Wholly Owned Subsidiary)

Apart from the above, if the foreign company is looking to enter India only for the execution of projects awarded; then, it may consider to set up Project Office (PO) specifically for executing the project in India. Recently, the Exchange Control Regulations of India has also permitted the Foreign Direct Investment (FDI) in Limited Liability Partnership (LLP). However, this is in the initial stages and hence, the same is not included in the table below.

Liaison Office (LO)	Branch Office (BO)	Company (WOS)
Approvals / Permission / Submission of Annual Return
·        Reserve Bank of India (RBI) approval is required. ·        Registration with Registrar of Companies (ROC) is required by filing an application alongwith prescribed documents within 30 days of the opening of the liaison office. ·        Profit making track record during immediately preceding 3 financial years in the home country. ·        Net worth not less than USD 50,000 or its equivalent. ·        Applicant not satisfying eligibility and which are subsidiaries of other companies may furnish a letter of comfort from parent company that satisfies eligible criteria. ·        Unique Identification Number (UIN) is allotted by RBI. ·        UIN to be quoted on all future reference with RBI and AD. ·        With effect from 1 February 2010, LO shall furnish two copies of Annual Activity Certificate (AAC) on or before 30 September every year for the year ended 31 March to the AD bank and to DGIT (International Taxation).	·        RBI permission needs to be obtained by filing an application in Form FNC with Authorised Dealer (AD). ·        Registration with ROC is required by filing an application alongwith prescribed documents within 30 days of the opening of the branch office. ·        Profit making track record during immediately preceding 5 financial years in the home country. ·        Net worth  not less than USD 100,000 or its  equivalent. ·        Applicant not satisfying eligibility criteria and which are subsidiaries of other companies may furnish a letter of comfort from parent company that satisfies eligible criteria. ·        Unique Identification Number (UIN) is allotted by RBI. ·        UIN to be quoted on all future reference with RBI and AD. ·        With effect from 1 February 2010, BO shall furnish two copies of Annual Activity Certificate (AAC) on or before 30 September every year for the year ended 31 March to the AD bank and to DGIT (International Taxation).	·        Foreign direct investment (FDI) is permitted in various sector subject to sectoral caps and approvals. ·        The investment in sector will be permitted either under automatic route or under approval route. If the sector falls into approval route, the approval from Foreign Investment Promotion Board (FIPB) will be required. ·        Application for incorporating company to be submitted to RoC, in accordance with the provisions of the Indian Companies Act, 1956. ·        UIN is allotted by RBI on filing intimation for receipt of funds. ·        UIN to be quoted on all future reference with RBI and AD. ·        Required to submit Annual return of Foreign Liabilities and Asset in specified format by 31 July every year.
Permitted Activities
·        Representing in India the parent company / group companies. ·        Promoting export import from / to India. ·        Promoting technical / financial collaborations between parent /group companies and companies in India. ·        Acting as a communication channel between the parent company and Indian Companies.	·        Export / Import of goods. ·        Rendering professional or consultancy services. ·        Carrying out research work, in areas in which the parent company is engaged. ·        Promoting technical or financial collaborations between Indian companies and parent or overseas group company. ·        Representing the parent company in India and acting as buying / selling agent in India. ·        Rendering services in Information Technology and development of software in India. ·        Rendering technical support to the products supplied by parent/group companies.	·        Activities are not restricted. ·        However, foreign direct investment in certain sensitive activities / sector is not permitted.
Repatriation of Dividend / Profit
·        N. A.	·        Repatriation of the profits is permissible subject to payment of income tax.	·        Repatriation of the dividend is permissible subject to payment of dividend distribution tax @ 15% (plus applicable surcharge and education cess).
Repatriation of capital
·        Repatriation of capital invested in a liaison office requires RBI approval.	·        Repatriation of capital invested in a branch office requires RBI approval.	·        Repatriation of capital invested in a Company is possible by way of sale of shares, buyback, capital reduction or liquidation.
Taxation of Profits
·        Carrying out revenue activities is not permitted. ·        As there will be no income generation, LO will not have to pay tax in India. ·        However, the nature of activities needs to be examined in detail to check whether any tax liability would arise.	·        BO in respect of its profits attributable to the Indian branch is taxable at the rate of 40% (plus applicable surcharge and education cess). ·        Further, BO except in certain instances is normally considered as a permanent establishment in India of the parent company and the world income of the parent company attributable to the BO in India could be subject to tax in India. ·        Furthermore, the transactions between the BO and its parent/associate companies would have to be in accordance with the prevalent transfer pricing guidelines in India.	·        The wholly owned subsidiary being an Indian company would be subject to income tax at the rate of 30% (plus applicable surcharge and education cess). ·        It may also be noted that remittance of profits by an Indian company to its shareholders in the form of dividends would be subject to dividend distribution tax at the rate of 15% (plus applicable surcharge and education cess) in hands of the Indian company. ·        The transactions between the wholly owned subsidiary and its parent/associate companies would have to be in accordance with the prevalent transfer pricing guidelines in India.

Disclaimer:

No assurance is given that the revenue authorities/courts will concur with the views expressed herein. My views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. I do not assume responsibility to update the views consequent to such changes. The views are for the general use by public at large and the author does not undertake any responsibility for the use / misuse of the same or any damage that may be caused because of such use / misuse. It is strongly recommended that before implementing any of the above options, the subject matter expert be consulted.