India Entry Option - A note on Laison Office in India

           Note on Liaison Office (LO)

A Liaison Office is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A Liaison Office is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from parent company through normal banking channels.

Any foreign company intending to open a Liaison Office in India is required to obtain prior approval from the RBI, the apex bank in India. Approval is usually granted for one to three years and can be renewed on expiry thereof.  The details on the Exchange Control Regulation and tax implications of an Laison Office is annexed herewith.

          (I)       Exchange Control Regulations

For establishing a LO, an approval is required to be obtained from Reserve Bank of India (“RBI”). A LO is defined under Foreign Exchange Management (“FEMA”) Regulations as follows.

“Liaison Office means a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel”

LO is permitted to carry out only the following activities in India:

     ·         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

For setting up of LO, there should be profit making track record during immediately preceding 3 financial years in the home country. Further, the net worth[1] should not be 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.

The powers relating to approval of LO are delegated to an Authorized dealer.

As per the regulations, LO is not permitted to carry on any business activity which leads to generation of income.  

An approval to LO is usually granted by RBI for one to three years and can be renewed on expiry thereof. 

Obtaining LO approval generally requires 6-8 weeks time. Similarly, for closing LO permission of RBI is required which also takes a period of 6-8 weeks. Further, the No Objection Certificate may be required to be obtained from income-tax authorities in India.

The cost of setting up / operational cost of LO is lower compared to Branch Office or Subsidiary Company.

LO will also be required to comply with Indian Company law provisions viz. 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.

With effect from 1 February 2010, LO / 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).

In case the year end is different than 31 March, the AAC can be submitted within 6 months from the due date of balance sheet. The combined AAC can be filed in case of multiple LO / BO. Further, PAN is required to be quoted in AAC

The expenses of liaison office are to be met only out of funds repatriated from abroad. LO is not permitted to enter into contracts in its own name.

Repatriation of capital invested in a liaison office requires RBI approval.

     (II)         Income-tax implications

LO should generally not be subject to tax under the Income-tax Act, 1961 as there is no profit generated from liaison activities. However, it is necessary to examine in detail the actual activities performed by LO for analysing India tax implications. India has entered into Tax Treaty with France and hence, the tax implication from the activities carried out in India will required to be determined under the India-France Tax Treaty as well.

In terms of section 285 of the Income-tax Act, 1961, a LO is required to file report in Form No. 49C within 60 days from the end of financial year with the income-tax authorities in India.

Further an LO will be required to withhold tax in certain cases for which a TAN may be required to be obtained.

---

[1] Net worth: Paid up share capital + free reserves – intangibles assets (computed as per latest audited balance sheet or account statement certified by public accountant or registered accounts practitioner

Service Tax Registration - Centralised or Multiple - Difference? - By Jay Dedhia

This post is by Jay Dedhia. He can be reached at jaydedhia@yahoo.com

Single or Multiple Registration ?

Registration of Service Provider:

When a person provides single taxable service from one premises/office, he is required to seek registration with the service tax authorities having jurisdiction over the area where his premises statute.

This is the simplest business situation, there may be cases where the assessee provides more than one service or has more than one office or works under more than one name. 

Registration requirements in such cases have been discussed below under following heads:

(i)          Assessee has more than one proprietorship firm in different names.

(ii)        Assessee provides/receives more than one taxable service.

(iii)    Assessee provides one or more than one taxable service from different premises or offices. 

(i)                Assessee has more than one proprietorship firm in different names: 

A service provider may have more than one sole proprietorship firm in different names, though he remains the owner in all the cases. All these sole proprietorships may render different taxable services from the same premises. In such a case, the service provider shall obtain separate registration for each of such sole proprietorship.

(ii)            Assessee provides/receives more than one taxable service : 

If the assessee provides more than one taxable service (i.e. multiple taxable services), he may make a single application, mentioning therein all the taxable services provided by him. [Rule 4(4) of Service Tax Rules, 1994]

Certificate of Registration in Form ST-2 should also indicate the details of all he taxable services provided by the service provider.

(ii)            Assessee provides one or more than one taxable service from different premises or             offices: 

Such assessee may have a centralised billing or accounting system or may not have centralised systems at all.

Under centralised billing system, bills are raised from the main office (may be regional office or head office) whereas services are provided from different offices or premises throughout the country. No single branch raises the bill for the services provided by it but the same is intimated to the main office which handles the raising of bills.

Under centralised accounting system, bills are raised from various branches of the assessee but are accounted for at one office where the centralised accounting system is located. Thus, all the branches are permitted to raise their own bills for rendering the service to the clients but the accounting of the bills is done at a single office.

When the assessee does not have either centralised billing or centralised accounting system, he is required to make separate application for registration in respect of each of such premises or offices to the jurisdictional Superintendent of Central Excise and obtain separate registrations. [Rule 4(3A) of Service Tax Rules, 1994]

However, in case the assessee maintains centralised billing or centralised accounting system, he has an option to register such premises or offices where such centralised billing or centralised accounting systems are maintained. [Rule 4(2) of Service Tax Rules, 1994] 

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 is TDS on sale of property by NRI determined? - A Case Law

How is TDS on sale of property by NRI determined?

TDS on sale of property by NRI – 1% or 10% or 20% depends on residential status?

Background

An individual (Mr. X) is a citizen of India and is currently residing outside India. Mr. X has purchased the flat in the financial year 2000-01 for INR 375,000. Mr. X is now proposing to sale the said flat at INR 4,000,000 during the financial year 2013-14.

The stay pattern of Mr. X is as under.

Particulars	No. of days
Stay during the tax year 2013-14	20 days
Stay during the tax years 2009-10 to 2012-13	175 days
Stay during the tax years 2006-07 to 2012-13	265 days

Based on the above details, the residential status of Mr. X and the nature of gain will be as under.

Residential status

In terms of section 6(1) of the Act, an individual will be considered as resident in India for the financial year 2013-14 if any one of the following condition is satisfied:

         i.            if his stay in India exceeds 181 days during the financial year 2013-14; or

       ii.            if his stay in India in the preceding four years exceeds 364 days and exceeds 59 days in the relevant financial year 2013-14.

In the present case, the stay of Mr. X is only 20 days and accordingly, none of the aforesaid conditions are satisfied. Accordingly, the status of Mr. X will be regarded as non-resident for the purpose of the Act. 

Capital gain

Under the provisions of the Act, the gain arising from transfer of capital asset (immovable property) can be classified as either short term capital gain (STCG) or long term capital gain (LTCG).

The nature of gain depends upon the period of holding of the immovable property (flat).

·         If the flat is held for more than 36 months on the date of sale, the gain will be regarded as LTCG;

·         If the flat is held for less than or equal to 36 months on the date of sale, the gain will be regarded as STCG.

In the case at hand, the gain derived by Mr. X will be considered as LTCG as the flat is held for more than 36 months on the date of sale.

Having discussed that Mr. X will be regarded as non-resident for the purpose of the Act and the gain derived is LTCG, we shall now look into the finer aspects of the rate of TDS to be applied by the purchaser.

Section 194IA – Payment to resident

It may be noted that the Finance Act, 2013 has introduced the new section 194IA in the Income-tax Act, 1961 (“the Act”) which provides that any person responsible for making payment of consideration towards sale of immovable property to resident transferor is required deduct tax at source @ 1% of sale consideration.

Here, Mr. X is non-resident for the purpose of the Act. Consequently, the provisions of section 194IA will not be applicable.

Section 195 – Payment to non-resident

As per section 195 of the Act, tax is required to be deducted from the payment made to a non-resident at the rates in force if such payment is chargeable to tax under the Act.

The term “rates in force” is defined in section 2(37A)(iii)  as the rate which is prescribed under the Finance Act of the relevant year or the rate prescribed in the Tax Treaty entered into by Central Government of India for the purpose of avoidance of double taxation in terms of section 90 of the Act. The rates of tax are provided in Part II of First Schedule to the Finance Act, 2013 as under.

·         Item 1(b)(i)(B) to Part II of First Schedule to the Finance Act, 2013 - tax @ 10% is required to be deducted from the payment by way of long term capital gains referred to in section 115E of the Act. The above rate of tax will be further increased by education cess @ 3%. Consequently, the effective rate of tax will be 10.3%.

·         Item 1(b)(i)(D) to Part II of First Schedule to the Finance Act, 2013 - tax @ 20% is required to be deducted from the payment by way of long term capital gains. The above rate of tax will be further increased by education cess @ 3%. Consequently, the effective rate of tax will be 20.6%.

The issue may arise as to the rate of TDS to be applied by the purchaser of flat.

·         In this connection, reference may be invited to the provisions of Chapter XII-A – Special Provisions relating to Certain Incomes of Non-resident. The provisions of the said Chapter XII-A are applicable to Non-resident Indian (NRI). The definition of NRI is provided in section 115C(e) of the Act as under.

“Section 115C(e): ‘non-resident Indian’ means an individual, being a citizen of India or a person of Indian origin who is not a ‘resident’.

Explanation.—A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India”

In the present case, Mr. X is a citizen of India. Further, as mentioned above, Mr. X is regarded as non-resident for the purpose of the Act. Under the circumstances, Mr. X will be regarded as NRI for the purpose of Chapter XII-A of the Act.

Having said that the provisions of Chapter XII-A are applicable to Mr. X, reference is now invited to the provisions of section 115E of the Act.

“Section 115E: Where the total income of an assessee, being a non-resident Indian, includes—

(a)  any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b)  income by way of long-term capital gains,

the tax payable by him shall be the aggregate of—

(i)                  the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;

(ii)                the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and

(iii)               the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b)”

The term “specified asset”[1] is defined in section 115C(f) of the Act in an exhaustive manner. The immovable property (flat) is not included in the list of ‘specified asset’. Accordingly, the income derived from sale of property by Mr. X will be covered within the provisions of section 115E(a) of the Act. Consequently, Mr. X will be governed by the Item 1(b)(i)(B) to Part II of First Schedule to the Finance Act, 2013 and rate of TDS will be 10%.

Since the abovementioned rate of 10% is beneficial to Mr. X, the general rate of tax of 20% on LTCG will not be applicable.

To conclude, the following points should be kept in mind.

·         Rate of 1% of TDS is applicable only in case of resident transferor;

·         In case of non-resident transferor, the rate of TDS will be as under.

o   TDS @ 10% if the transferor is NRI covered by section 115E of the Act;

o   TDS @ 20% if the transferor is non-resident covered under the general provisions of section 112 of the Act.

---

[1] Section 115C(f) : "specified asset" means any of the following assets, namely :—

   (i) shares in an Indian company;

  (ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

 (iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

 (iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

  (v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette

Our views expressed herein are based on the facts and assumptions of case law. No assurance is given that the revenue authorities/courts will concur with the views expressed herein. Our views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. We do not assume responsibility to update the views consequent to such changes. The views are exclusively for own use and shall not, without our prior written consent, be disclosed to any other person. We shall not be liable to any person for any claims, liabilities or expenses resulted primarily from bad faith or intentional misconduct. We strongly suggest that a subject matter expert opinion is taken before use of this opinion.