Budget 2013 saw a steep hike in the tax rate on royalties and fees for technical services that an Indian company pays to a Non Resident Indian or a Foreign Company. The rate went up from 10 per cent to 25 per cent.
This was done in order to correct an anomaly. The rate of tax on royalty in the Income-tax Act was lower than the rates provided in a number of Double Tax Avoidance Agreements.
So who does this impact?
NRIs receiving royalties
Royalty essentially means any payment made where the original property is retained by the owner and only the right to use is licensed out to the user. According to the Income Tax Act, in the context of this clause, "royalty" means consideration for any of the following:
- the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property
- the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property
-the use of any patent, invention, model, design, secret formula or process or trade mark or similar property
- the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill
- the use or right to use any industrial, commercial or scientific equipment
- the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films
-the rendering of any services in connection with the activities referred to above
NRIs receiving fees for technical services
"Fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration that may come under the head "salaries." If you fall under either of the above two definitions, your income tax rate on such receipts will now be 25 per cent instead of 10 per cent.
Relief under the Double Taxation Avoidance Agreement (DTAA)
If you are an NRI residing in a country that India has a DTAA with, then the rate of 25 per cent will not apply to you. In the case of India-US DTAA, the following rates will apply to you.
In case of royalties (Article 12 of India US DTAA), during the first five taxable years for which this Convention has effect,
(A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of India, a political subdivision or a public sector company; and
(B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and
During the subsequent years, 15 per cent of the gross amount of royalties or fees for included services.
In the case of royalties and fees for included services that are ancillary and subsidiary to the enjoyment of the property for which payment is received, 10 per cent of the gross amount of the royalties or fees for included services.
If you are an NRI receiving royalty payments for services provided in India, you will be subject to TDS as per the rates mentioned above. You will however also be taxed in the US but you can claim a credit of the TDS paid in India.
If you are an NRI providing professional services (Article 15) to a company or person in India, the income will be taxed only in the US. Therefore, no tax would be deducted at source on this income.
Claiming the reduced rate
In order to claim the reduced rate of TDS or waiver of TDS under the DTAA, you would need to submit a tax residency certification from the country of your residence. This will certify that you are a tax paying resident in that other country and that tax on that income is being duly paid in that country, ensuring no leakage of tax revenue for either countries. In the US, the tax residency certificate is called Form 6166 and the application needs to be made to theInternal Revenue Service (IRS) in Form 8802.
Today, economic and social change in India is significantly driven by non government organizations (NGOs) and other charitable organizations. As an Indian American, if you want to contribute to that change, there are some things you must know about making donations to charitable organizations and getting a tax deduction for US tax purposes.
"A charity must be registered with the Internal Revenue Service (IRS) to be eligible for deductions on contributions. Just because a charity is registered in India, it does not make it exempt for US tax purposes," says Vinay Navani, a CPA and Shareholder at New Jersey based firm Wilkin & Guttenplan, PC.
What this means is that if you donate to an Indian charity directly, you will not be able to avail of a tax deduction on your US tax return. If you have significant income within India and you pay taxes in India, such a donation can get you a tax break in your Indian tax return under section 80G but not on your US tax return.
If you want to make a donation to an Indian cause and also get a tax deduction in your US tax return, there's a simple way to do it."There are several US registered charities that operate in India. You can contribute to them and get a tax break on your US tax return," Navani explains.
Some of these charities include India Development and Relief Fund (idrf.org), Pratham USA (prathamusa.org), Asha for Education (ashanet.org), Seva Foundation (seva.org), Sankara Eye Foundation USA (giftofvision.org), Association for India's development (aidindia.org), American India Foundation (aif.org). These are all registered with the IRS and channel their funds to causes in India.
You can find more charities here. You can also get their IRS registration status here.
Charitable contributions are deductible on your US tax return only if you itemize your deductions on Form 1040 schedule A.
For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain a record of the contribution either by way of a bank record or a written communication from the qualified organization. If you donated gifts in kind, you generally can deduct the fair market value of the property. For any contribution of $250 or more (including contributions of cash or property), you must get a written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed.
You must fill out Form 8283, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return.
NEW DELHI: The government has said overseas remittances will not attract service tax, putting to rest the concerns raised in view of new service tax norms.
"The matter has been examined and it is clarified that there is no service tax per se on the amount of foreign currency remitted to India from overseas," said a circular issued by the Central Board of Excise and Customs.
The clarification come in the backdrop of concerns expressed in several quarters that overseas remittances would face 12% service tax under the negative list regime applicable from July 1.
India, one of the top recipient of remittances, got $ 64 billion in 2011, according to the World Bank data.
Chief Ministers of Punjab and Kerala, which are among the states receiving the largest remittances from expatriates, had taken up the matter with Prime Minister Manmohan Singh.
"Concerns have been expressed in various fora regarding the leviability of service tax on the remittance of foreign currency in India from overseas....Remittance comprises money, the activity does not comprise a 'service' and thus not subjected to service tax", it said.
In case any fee or conversion charges are levied for sending such money, they are also not liable to service tax as the person sending the money and the company conducting the remittance are located outside India, the circular issued by the apex indirect taxes body said.
The CBEC further clarified that Indian bank or financial institution which charge the foreign bank for the services provided at the receiving end, is not liable to service tax.
It is praise worthy weakness of a man to love the places where he played in his childhood, where he was educated, where he dwelt and call back to the mind his childhood pleasure. The recent fears of recession in the west compounded by the growth story in India, as well as the lure of returning to one's own motherland may change the minds of many Indians who have settled abroad to return to India permanently.
This may mean that they could be looking at resettling in India by selling their property abroad which they would have acquired whilst being there. This decision may not be just an emotional one but would have to factor other perspectives like taxation, exchange control regulations etc, which may significantly impact the decision of shifting back to India and its timing.
Subin, a person of Indian origin, was employed in the US for the past several years. He wants to return to India permanently. He owns several assets in the US such as a residential property, a car, and investment in shares in US based companies. He has also invested in mutual funds there. He is pondering on whether to sell his property in US before he returns to India permanently, but wants to get his car to India and if permitted, retain his investments in the US.
While discussing his idea of coming back to India permanently with a friend, he found out that there were certain advantages that he could derive in case he qualifies as a Non-Resident (NR) in India under the Indian tax laws. He also found out that the simplest way to qualify as a NR in India is to spend less than 60 days in India in any particular tax year, which runs from April 01 to March 31 of the subsequent calendar year. Accordingly, Subin has planned his return in such a way that he qualifies as a NR in India in the year in which he returns to India.
His decision to return to India would have both direct and indirect tax implications, such as income tax, wealth tax and customs duty. He would also need to take note of implications from an exchange control regulations perspective.
The implications under each of the above mentioned laws need to be understood distinctly. As per the Indian income-tax laws, NRs are taxable in India only on income which accrues in India or is received in India. In the case of an NR, once an income is earned and received outside India and it is brought to India at a later date, it would not be taxable in India.
This would mean that Subin could sell his residential property in US, while he is an NR or a Not Ordinarily Resident (NOR) in India, and he would not be taxable in India on the gain that he makes from the sale. Similarly, he would not be taxable in India on the income earned and received by him in the US from his investments till he qualifies as a NR or NOR in India. Once Subin loses the status of a NR or NOR and qualifies as an Ordinary Resident in India, he would be taxable in India on his global income.
This would typically happen in the third or fourth year from the time Subin shifts to India (depending on how extensively he has stayed in India prior to shifting to India permanently). However, in case Subin is paying taxes on any income in the US which is taxable in India as well, he may be able to avail relief under the Double Taxation Avoidance Agreement which India has entered into with the US, for avoiding double taxation of the same income in both the countries.
The provisions for determining residency under the wealth tax laws are the same as that of the Income Tax laws. In the case of NRs and NORs, the current wealth tax provisions provide that any assets located outside India would be excluded from the ambit of wealth tax in India. Hence, Subin will not be required to pay wealth tax in India on the assets that are located outside India, as long as he qualifies as a NR or NOR in India.
If he intends to reside in India permanently, he would not be required to pay wealth tax on money and the other assets brought by him into India from the US, within one year immediately preceding the date of his return or later. This exemption is limited to seven successive years which immediately follow the year in which Subin returns to India.
Also, as per Baggage Rules, 1998, since, Subin had used his car in the US for personal purposes for more than a year and he is transferring residence to India now, he could bring his car with him but would be required to pay customs duty on the same. However, considering the quantum of custom duty liability likely to arise due to the import, it may be a better idea to buy a new car in India subsequent to shift of his residence. In addition to the car, he would be able to get certain specified used personal effects upto a specified threshold without payment of customs duty.