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| Non-residents to pay 10 per cent on long-term capital gain on shares |
| HP Agrawal / New Delhi Sep 21, 2009, 00:05 IST |
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Foreign Companies and other non-residents are making huge investments in the shares of Indian companies in order to promote their business activities in the country. Indian firms attracting foreign investment may or may not be listed on Indian stock exchanges. Many of such companies are subsidiaries of foreign companies.
What is the implication of income-tax on non-residents on capital gains arising to them on sale of such shares? In many cases, the transaction is between two or more non-residents living outside India. In such a case also, the capital gain, if any, will be liable to tax in India. (See Vanenburg Group B.V., In Re2007-(159)-TAXMAN-0219-AAR.)
The long-term capital gain is normally taxed @ 20 per cent but where the gain relates to listed shares on which STT has also been paid, the transaction is exempt from tax uôs 10(38). However, where the shares of listed company are transacted out of the stock exchange and no STT is paid, the rate of tax is 10% under proviso to section 112(1).
There has been a difference of opinion between the Income-tax Appellate Tribunal and Authority for Advance Rulings on the issue whether the concessional rate of 10 per cent will be available to a non-resident company or not. In fact the rate of 10 per cent as contained in proviso to Section 112(1) applies on the amount of capital gain calculated before giving effect to the provisions of the 2nd proviso to Section 48, i.e. indexation of cost of acquisition. As per the Tribunal, the concessional rate provided in the proviso to Section 112(1) will be available only in those cases where the benefit of indexation is applicable. Where the provisions of indexation as contained in second proviso to Sec.48 are not applicable, the concessional rate of 10% will not be available. Reference in this connection may be made to BASF AKTIE NERESELLSCHAFT VS. Dy. CIT 293 ITR (AT)1
On the other hand, the Authority for Advance Rulings has been consistently taking a view that the benefit of lower rate of tax conferred by the proviso to section 112(1) can very well be invoked by a non-resident assessee. The language used in proviso to Sec.112(1) does not deny the concessional rate of tax to the category of the assesses who are not eligible to have the benefit of indexed cost of acquisition as provided in Sec.48. In other words, the eligibility to avail the benefit of indexed cost is not a sine qua none for applying the reduced rate of 10 per cent prescribed in Section 112(1). Reference in this connection may be made to a recent case of Fujitsu Services Ltd. decided by AAR on 23rd July, 2009.
If the view of the Tribunal is to be accepted then the long-term capital gain is taxable @20 per cent - both for Indian companies and foreign companies. However, the said rate of 20 per cent will be reduced to 10 per cent, in case of Indian companies where the indexation provisions are applicable. Since indexation provisions are not applicable to foreign companies such companies will be liable to pay tax @20 per cent.
As per Tribunal’s interpretation, foreign companies stand in a disadvantageous position compared to Indian companies. This will create a discrimination against foreign companies and will therefore be against the principles envisaged in the tax treaties India has signed with other countries.
The tax treaties invariably contain provisions of non-discrimination against foreign enterprises which in effect provide that a foreign enterprise in India will not be subjected to any taxation which is more burdensome than the taxation to which Indian enterprises are subjected to under similar conditions. If foreign enterprises are discriminated against by imposing higher rate of tax, it is certainly a question mark on India’s commitment to the tax treaties made with other sovereign States.
Therefore, the view that the concessional rate of 10 per cent is available to foreign companies also appears to be the correct position of law.
(Author is a partner in S S Kothari Mehta & Co.)
hp.agrawal@sskmin.com
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