Taxation of Capital Gain on Transfer of Share of Indian Company by Non-Resident
Scope of Total Income: What is included in the total income of non-residents in India
Section 5(2) of the Income Tax Act,1961 (“the act) provides for the scope of income taxable in India for non-residents. This section provides that the Income of non-residents includes the below income, all income from whatever source derived which-
- is received or deemed to be received in India
- accrues or arises or is deemed to accrue or arise
Which income shall be deemed to accrue or arise in India?
As per section 9(1)(i) of the Income Tax Act, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
It envisages taxability where income may arise outside India due to a transfer happening outside India but is still deemed to occur in India if the capital asset transferred is situated in India.
Share of India company will be deemed to be capital assets in India
Capital Gains Tax for Non-Residents
Charging Section for Capital Gain
Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, be chargeable to income tax under the head “Capital gains”, and shall be deemed to be the income of the last year in which the transfer took place.
Taxability under the Double Taxation Avoidance Agreement (DTAA)
India has entered into Double Tax Avoidance Agreements (DTAA) with several countries. As per Section 90(2), non-resident taxpayer is determined as per the provisions of the Act or the applicable DTAA, whichever is more beneficial.
- Capital gains taxation under DTAA often differs from other incomes.
- Capital Gain is discussed in Article 13 of the OECD & UN Models12. The Models provide that gains from alienation of assets are taxable in the Country of Residence (COR), i.e., where the seller is a resident.
- For some assets, the Country of Source (COS) is also given the right to tax, i.e., where the asset is situated (situs of the asset). Generally, the country, that has the right to tax the income from the asset, is given the right to tax gains from the sale of such assets.
- As per the basic principle of International taxation, a Country of Residence always has the right to tax. The Country of Source may be given full/partial / or no rights to tax.
- In very few DTAAs (e.g., India-UK & India-USA), it is provided that each country can tax capital gains according to its domestic law.
- If the DTAA permits India to tax capital gains, India can tax it as per its domestic law. The computation, disallowance, exemption, rate of tax, etc., apply as per domestic law. India may tax the gain as capital gain or any other income.
- The taxation of Capital Gains is based on the kind of asset sold. The details are discussed concerning the UN model.
Computation of Capital Gain for Non-Residents:
Section 48 of the Income Tax Act, of 1961 provides the provision for the computation of Capital Gain. The full value of consideration received on transfer is to be reduced by the expenditure on transfer and the cost of acquisition or improvement. However, this computation is subject to certain adjustments as required by the provisos to Section 48.
Special Provisions for Shares or Debentures
The first proviso to Section 48 provides for the adjustment of foreign exchange fluctuations in the value of the rupee. This provision applies to:
- Capital gains – short-term or long-term;
- arising on transfer by a non-resident;
- of shares or debentures of an Indian company;
- purchased out of foreign currency.
In such a case, capital gains shall be computed by converting the amount of sale consideration into the same foreign currency as was used at the time of purchase. Thus the proviso, in essence, prescribes the computation of capital gain in foreign currency. Such conversion neutralizes the impact of any fluctuation in the value of the rupee.
Where unlisted shares are a long-term capital asset transferred (taxable u/s 112(1)(c)(iii) of the Act):
Step 1: Capital gains/ loss to be computed by giving effect to the first proviso of Section 48 of the Act read with Rule 115A of the Income Tax Rules, 1962 (‘the Rules’). Where such computation results in capital loss in the hands of the transferor, then step 2 is not required to be followed. However, where the said computation as per the first proviso of Section 48 of the Act results in capital gains, then step 2 is to be followed.
Step 2: Capital gains to be recomputed without giving effect to the first proviso of section 48 of the Act (i.e., in INR currency only) and tax at the applicable rate to be calculated on such gains
Where unlisted shares being short-term capital assets are transferred:
Capital gains/ loss to be computed by giving effect to the first proviso of section 48 of the Act read with Rule 115A of the Rules. Where such computation results in capital gains, such gains are to be reconverted into INR as per Rule 115A itself and such gains are to be taxed at the applicable rate.
Rate of Capital Gain Tax when non-resident sell the share of India Company
Under the Income-tax Act, 1961 (‘the Act’)
Nature of Capital Gain | Relevant provisions | Capital Gain Tax Rate |
LTCG(where unlisted shares are held for more than 24 months) | Section 112 of the Income-tax Act, 1961 | 13.65% |
STCG (where unlisted shares are held for a period of up to 24 months): | Part II of The First Schedule of the Finance Act 2024 | 38.22% |
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