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Can a US citizen residing in the UAE claim tax benefits in India?

Factors to be taken into consideration include permanent home, centre of vital interests

Question: I am a resident of the UAE but a citizen of the United States. However, my main business is in India. I have a residential house both in India and the US. I am worried I may be subjected to Indian tax laws though I am a US citizen. What are your views?

ANSWER: Under Article 4.2 of the Double Tax Avoidance Agreement (DTAA) entered into by India with the United States, various tests have to be applied sequentially to determine the country where you will be liable to tax. Under the first test, a person is deemed to be resident of the country in which he has a permanent home. Since you have a permanent home both in India and in the US, you will have to go to the second test which is to determine the country with which your personal and economic relations are closer. This test determines ‘the centre of vital interests’. As you are running a regular business in India, the centre of vital interests is deemed to be in this country. Therefore, you will be deemed to be a resident of India under the DTAA. The fact that you are a citizen of America is not relevant. Hence, you will be liable to pay tax in India on your total income. If your income earned in the US is taxed in that country, you will get a set off of the tax paid in America against the tax payable in India. There are several decisions of courts and tribunals in India where a person has been made liable to Indian taxes in circumstances which are similar to yours. Hence, even if you appeal against the Indian tax assessment, the chances of success are slender.

Question: To meet the challenges posed by a large number of graduates seeking jobs in India, I recollect that the Government had announced some scheme for their training so that they can be absorbed in manufacturing jobs. Can you shed some light whether this scheme is being implemented?

ANSWER: The internship scheme which was announced by the finance minister seeks to provide opportunities for training to around 10 million young graduates over a period of five years as part of an exercise to bridge the skills gap faced by Indian industry. The scheme is managed by the Ministry of Corporate Affairs and so far 200 Indian companies have registered. Opportunities have been provided across various sectors and apart from the manufacturing industry, internships are offered in oil, energy, FMCG, travel and hospitality, and banking and financial services sectors. The work profiles include manufacturing and operations management, production, sales and marketing, etc. In the first phase of the scheme which started last month, companies registered on the dedicated portal and listed out the internships which were being offered under the scheme for those within the age group of 21 to 24 years. The interns will gain exposure for 12 months to a real life business environment which will enable them to avail of full time employment opportunities in due course. Companies are expected to bear the training costs and 10 per cent of the internship cost from their corporate social responsibility (CSR) contributions.

Question: You had mentioned in an earlier column that futures & options (F&O) carry substantial risks and should be avoided. I am told that Sebi has now imposed some restrictions. Can you please elaborate the recent guidelines?

ANSWER: There are more than 10 million individual F&O traders in India. According to a recent study by the Securities & Exchange Board of India, 93 per cent of these traders have incurred losses of around Rs.200,000 each on an average. While in equity the risks arise mainly from price volatility due to various reasons including geopolitical uncertainties, derivatives trading is an unnecessary additional risk which individuals take lured by the prospects of making quick profits, in much the same way as gamblers do. To curb this tendency, Sebi has made it more difficult for individuals to participate in equity derivatives trading by raising the entry barrier in terms of contract size. The contract’s stipulation has now been revised to Rs1.5-2 million from the earlier contract’s value of Rs500,000-1 million. Further, under the new regulation, option buyers will be required to pay the premiums upfront, whereas in the past brokers were permitted to provide collaterals. Sebi has also done away with the special pricing on expiring contracts that enabled traders to take larger positions. The regulator will monitor position limits throughout the day instead of at the end of the trading session. This will help to control the volatile trading activity on expiry days. Exchanges have been advised to limit weekly expiries to one index per week instead of the current practice of multiple expiries. While these regulations are necessary, losses may still be incurred in speculative activities and therefore it is best to avoid getting into equity derivatives trading.

HP Ranina is a practising lawyer, specialising in corporate and tax laws of India.