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Indian resident liable to pay tax on world income

Dubai - This limit of deduction also covers life insurance premium and repayment.

Q: My son who works in an Indian company has to decide whether he wants to contribute to the provident fund scheme or whether he should subscribe to the National Pension Scheme. My son has taken a housing loan and also pays life insurance premium. Please advise.
- C.P. Ranka, Doha
A: If your son subscribes to the company's provident fund scheme, he has to contribute 12 per cent of his salary and the company would contribute a similar amount. His own contribution would be deductible, subject to the limit of Rs150,000 every year. However, this limit of deduction also covers life insurance premium and repayment of principal amount of housing loan. Since your son has taken a housing loan and is also paying premium for life insurance, the limit under section 80-C of the Income-tax Act of Rs150,000 may be exhausted with these two amounts. In that case, it is preferable to subscribe to the National Pension Scheme since an additional amount of Rs50,000 is deductible under section 80-CCD.
In fact, the pension scheme is becoming popular in India. According to the Pension Fund Regulatory and Development Authority, a record number of 130,000 new subscribers were enrolled in 2015-16. This figure is likely to increase from the current financial year because the government has now changed the rules for tax exemption 40 per cent of the amount withdrawn at the time of maturity. Annual pension when received after the specified date is treated as income. However, in most cases, such income may be within the initial exemption limit prevailing at that time and, therefore, may not attract any tax.
Q: An American company which we represent in the Gulf is providing web-hosting services to Indian enterprises. The American company has claimed that the fees earned by it from the Indian enterprises which have availed of these services cannot be taxed in India because no services have been rendered from India. Will this stand be accepted by Indian tax authorities?
- R.P. Ganatra, Bahrain
A: This is an issue on which there has been litigation which, so far, has been decided in favour of the foreign company which provides web-hosting services. Different benches of the Income-tax Appellate Tribunal have held that the amount earned by the foreign company cannot be treated as royalty under section 9(1)(vi) of the Income-tax Act. Further, it is not royalty under Article 12 of the Double Tax Avoidance Agreement between India and the United States of America. The Tribunal has rejected the tax department's view that fees earned by an American company for providing web-hosting service with the help of sophisticated scientific equipment is in the nature of royalty.
According to the appellate authority, consideration for use of scientific equipment can be treated as royalty only if that equipment is available for use to the Indian parties. If the Indian parties do not have access to the use of scientific equipment, the fees paid for services rendered cannot be treated as royalty, though the scientific equipment may be used in the United States for providing such services. 
Likewise, where data processing services were provided to an Indian enterprise by using a mainframe computer, it was held by the Tribunal that the fees paid to the American company could not be treated as royalty taxable in the hands of this company. Therefore, no tax was deductible at source while making payment of fees for availing of data processing services. This view has been followed by the Tribunal when fees were paid to an American company which provided web-hosting services.
Q: My brother who is resident in India wants to set up a company in the Gulf. Is it possible for him to remit funds from his Indian bank account and, if so, what are the regulations which he has to follow? What would be the tax implications in respect of profits earned by him in the Gulf?
- S.P. Rathore, Sharjah
A: Your brother who is resident in India is permitted to invest in a wholly-owned subsidiary or joint venture outside India. Such overseas direct investment is subject to the guidelines under the Liberalised Remittance Scheme (LRS) which is applicable to resident individuals. Currently, an amount of USD 250,000 can be remitted out of India under the LRS. However, your brother will have to submit an annual performance report to the Reserve Bank of India by June 30 every year in respect of such wholly-owned subsidiary or joint venture. This annual performance report can be self-certified by your brother. It does not have to be certified by a chartered accountant. Failure to do so would amount to violation of Fema guidelines.
Your brother will also have to file a tax return in India every year showing the profit or loss made in the enterprise which he has set up in the Gulf.  This will be scrutinised. A tax audit report will also have to be furnished with the return of income. Please note that your brother who is a resident of India is liable to pay tax on his total world income.
Q: I have earned substantial income in India through share market operations during the financial year ended March 31, 2016. I am told that I will need to file the tax return at the earliest. This may not be possible as I will be able to go to India only in August. What is the latest date by which I can file my tax return showing my Indian income?
- R.K. Dalvi, Dubai
A: For the assessment year 2016-17, relevant to the financial year ended on March 31, 2016, the due date for filing the tax return is July 31, 2016.  Under section 139(4) of the Income-tax Act, a belated return is permissible if it is filed by March 31, 2018, that is, within one year from the end of the assessment year. However, it is advisable to file the return by July 31, 2016. If you do so, you will be able to revise the return in case you find there was some omission or mistake in the original return.
Where the return is filed after the initial due date of July 31, the right to file revised returns is not available. Further, if you have any carried forward losses under the head capital gains or business, they can be carried forward for eight years only if the return is filed by the original due date of July 31. Please ensure that any outstanding income tax, including interest where applicable, is paid as self-assessment tax before July 31, otherwise penal interest would be leviable. Hence, it is advisable for you to come to India by early July this year so that you have enough time to prepare your accounts and file the return by July 31.
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.