NRI’s And TDS On Sale Of Property

Taxation on Sale of Property by Non Resident Indians is a bit confusing subject. This confusion is precipitated because of lack of information and improper explanation. Sometimes, it is the work of the professionals to complicate the things and confuse the NRI clients to maximize their gains. In few cases, it is observed that neither the buyer nor the NRI seller is familiar of what needs to be done. Let me admit that the Income Tax Act is not that complicated but it is in people who interpret it to make it complicated or simplified. To start with, selling of property by the NRI is taxable under u/s 195 of the Income Tax Act, 1961. This article is dedicated to the TDS liability at the time of selling of property in India. Let me rectify some common confusion first, TDS of 1% u/s 194IA is not applicable if the seller is an NRI. TDS u/s 194IA is only applicable for the resident Indian sellers. It is quite unlucky that most of the NRI clients lost money as TDS was deducted under both the sections i.e. under section 194IA and 195. The article on NRI’s and TDS on Sale of Property where we will understand the basic concept of TDS. Therefore this articles id kept very simple as there is a common perception that this subject matter is complex:

Broadly speaking any NRI selling a property in India, there are 3 main points related to taxation as per income tax act, 1961

(a) Capital Gain Tax from Sale of Property: The long term capital gain tax will be 22.66% only if the NRI is selling a property in India after holding it for more than 3 years. In case of the holding period which is less than 3 years then the Short Term Capital Gain Tax will be applicable as per the income tax slab. In case of the short term capital gain, the TDS applicable will be 33.99% irrespective of tax slab of the NRI. Many people are not aware that Capital Gain Taxation is same for both Resident Indians and NRI’s but the only difference is in the calculation and the deduction of the TDS. Generally, the main interest of the Income Tax department is that any capital gain arising out of sale of property in India then corresponding to the income tax should be paid in India. For the resident Indian seller, as he is staying in India therefore he does not have any other option but to comply with the income tax rules and regulations. Since the NRI is staying outside India therefore it is very difficult to make sure that the capital gain tax compliance after the property transaction is completed. In order to make sure the compliance, Income Tax Department came out with a new idea to make sure that the buyers deduct the TDS at the time of making the payment to the NRI seller. TDS u/s 195 is deducted only to make sure the capital gain tax compliance.

(b) TDS u/s 195: In case of sale of property by the NRI, it is necessary for the buyer to deduct 20.66% of TDS on the sale price of the property, if the capital gain is long term capital gain. In case of short term capital gain then TDS will be 33.99% irrespective of the income tax slab of NRI as it is mentioned earlier. Buyer will deposit the TDS with the Income Tax Department. TDS is applicable even if the value of property is less than 50 lakhs. For the resident Indian seller the TDS of 1% is applicable only if the property value is more than 50 lakhs.

Now deviation in this rule is that the NRI is subjected to pay the Capital Gain Taxonly on the Capital Gain rising out of sale of the property but unfortunately the TDS is deducted on the total Sale Value of the property. Hence in most of the cases there are no GAINS as such from the sale of property and actually the NRI obtain LOSS from the sale of the property if the TDS refund is not claimed. As a result, the NRI has to go through the process of claiming the TDS refund from the Income Tax Department.

(c) Re-Investment of Capital Gains: In some cases, it is observed that to save capital gain tax the NRI clients planned to re-invest the capital gain from the sale of property to save capital gain tax. The long term Capital Gain can be invested in either property or tax exempt bonds to save the long term capital gain tax. In such cases, the NRI can apply for the Tax Exemption Certificate from the Income Tax Department under the section 195 of the income tax act, 1961.

TDS Refund by NRI’S

1. If your country of residence has Double Taxation Avoidance Agreements (DTAA) with the Indian government i.e. the lower rate of TDS is allowed. NRI requires to submit a tax residency certification from the country of his residence. It will rectify that you are a tax paying resident in that country and tax on this income is paid in that particular country, it make sure that there is no tax leakage for either countries.

For example, in country A, the tax residency certificate is called Form 6166. You can make application to the Internal Revenue Service (IRS) in the Form 8802. In country B, you require to get the tax residency certificate from the HM Revenue and Customs.

2. If your total income in India is less than the basic exemption limit of Rs. 2.5 Lac then in that case, you can apply for a TDS waiver with the Income Tax officer under whose jurisdiction your case will fall.

3. You can claim TDS refund only if you can proof the reinvestment of capital gains in India. You can either purchase another house in India or invest in any capital gains bonds u/c 54EC. You require to submit an affidavit stating that you will invest the capital gain amount in the capital gain bonds. For purchasing of property, you can either produce the allotment letter or payment receipts.

Instead of claiming refund which is more dreary process it is always advisable to apply for NIL Tax Deduction / Tax Exemption / Lower Tax Deduction Certificate. It requires some intelligent planning before the sale of property and enthusiastic approach.

Tax Revolution And Economic Revolution

Taxation is the process by which the Government collects money from people to use for the desire of the public.

Generally, taxes are an involuntary fee collected on the individuals or corporations that is prescribed by a Government entity, whether local, regional or national in order to finance the Government activities.

Purpose of taxation

Taxes are mainly used to finance the expenses acquired by the Government to manage an economy. These expenses include: health care, education, transportation and operating the Government business entities etc. Taxation is also used by the Government for several other purposes such as:—

a. Expenses related to the building and the technology infrastructure.

b. To reduce the pollution by taxing outraging firms.

c. To discourage the unhealthy lifestyle such as, a tax on cigarettes and others like tobacco products, liquor etc.

d. To protect the local and new industries by taxing imports.

e. To achieve greater equality of wealth and income. Revenue from taxation is used to help the very poor such as providing food stamps.

f. To improve the balance of payments (BOP) by expanding the duties charged on the imported goods.

g. To control the consuming in an economy thus reduce the expansion

h. Prevent Concentration of Wealth in a few hands. Tax is levied on persons according to their income level.

Importance of taxation

As per Benjamin Franklin, but in this world nothing can be said to be certain, except death and taxes.

Taxation is important to the society because the Government uses the tax which is collected to fund projects related to health care systems, education systems, and public transports. The money which is collected can also be used to give an unemployment benefits, pensions, and other matters that can help the society as a whole. Without tax, the Government will not be able to fund the crucial projects and services that people require. The Government set aside the money which is collected from the taxpayers to different areas of the country. For example: There are some areas of our country which are rich in natural resources like minerals, fuels etc, if it is utilised properly then it will be beneficial for the development of the nation and its economy. The Government needs to set aside part of the tax money towards the development of such areas. Such allocation of finances generated by taxes by the Government which not only helps the nation’s economic growth but also helps the local habitants of such places by raising their standards of living which is consequentially positively affected by the development programmes undertaken by the Government. Similarly, expenses made by the Government on maintenance of the historic monuments, archaeological sites etc. which not only improves the standards of such places but also helps in generating more revenues by using tourism as a tool.

Moreover, another benefit for tax on the society is it discourages certain undesirable activities like liquor, tobacco and gambling. On such activities the Government enforces excise tax, discouraging the individuals from selling such commodities.

Economic growth and taxation

Economic growth is the basis of the elevated prosperity. Growth comes from the accumulation of the capital and from innovations which lead to the technical progress. Accumulation and innovation raise the productivity of inputs into the production and raise the potential level of the output. The rate of growth can be affected by the policy through the effect that taxation has upon the economic decisions. An increase in the taxation reduces the returns to investment in both physical and human capital and Research and Development (R&D). Lower the returns, which mean less accumulation and innovation and thus a lower rate of growth. This is the negative aspect of taxation. Also, taxation has a positive aspect. Some public expenditure can appreciate the productivity, such as the provision of the infrastructure, public education, and health care. Taxation provides the means to finance these expenditures and indirectly can subsidize to an increase in the growth rate. Taxation can have both a negative and a positive effect on the growth. The negative effect arises from the distortions to the choice and the disincentive effects. The positive effect arises indirectly through the expenditures financed by taxation.

The classical view of economics is that the only the objective of taxation is to raise the Government revenue. But with the changes in the circumstances and ideologies, the main aim of taxes has also been changed. These days apart from the object of increasing the public revenue, taxes is levied to affect the consumption, production and distribution with a view to protect the social welfare through the economic development of a country. For the economic development of a country, tax can be used as an essential tool in the following manner:

1. Optimum allocation of available resources

Taxation is the most essential source of public revenue. The imposition of tax leads to the diversion of the resources from the taxed to the non-taxed sector. The revenue is collected on various productive sectors in the country with a view to increasing the overall growth of the country. Tax revenues may be used to encourage the development activities in the less developed areas of the country where the normal investors are not willing to make any investment.

2. Raising Government revenue

In recent times, the main aim of the public finance is not solely to raise the sufficient financial resources for meeting the administrative expense, for maintenance of law and order and to protect the country from the foreign aggression but to make sure the social welfare. The increase in the collection of tax which increases the government revenue. It is safer for the government to avoid borrowings by increasing the tax revenue.

3. Encouraging savings and investment

Since the developing countries have mixed economy, care has also to be taken to promote the capital formation and the investment both in the private and the public sectors. Taxation policy is to be directed to promote the ratio of savings to the national income.

4. Reduction of inequalities in income and wealth

Through the reducing inequalities in the income and wealth by using an efficient tax system, the Government can encourage people to save and invest in the productive sectors.

5. Acceleration of economic growth

Tax policy may be used to handle the critical economic situation like depression and expansion. In depression, tax is set to uplift the consumption and reduce the savings to raise the aggregate demand and vice versa. Hence the tax policy can be used to strengthen the incentives to savings and investment.

6. Price stability

In underdeveloped countries, there is another role to maintain the price stability to make sure the growth with the stability which can be handled by a smart tax policy.

7. Control mechanism

Tax policy is also used as a control mechanism to check the expansion, consumption of liquor and luxury goods and to protect the local poor industries from the irregular competition. Taxation is the only effective weapon by which the private consumption can be restrained and the transfer of resources to the State. Hence the economy can make sure the sustainable development.

However, it can be said that the economic development of a country depends on various reasons i.e., one of them are on the presence of an effective and efficient taxation policy.

Tax revolution: tax reforms

The first comprehensive attempt at reforming the tax system was by the Tax Reform Committee in 1953. This provided the backdrop for the generation of the resources for the Second Five-Year Plan, 1956-60, and was required to fulfil a variety of objectives such as increasing the level of savings and investment, affecting the resource transfer from the private to the public sector and achieving a desired state of redistribution. Since then, there have been a number of attempts, most of them partial, to remedy various aspects of the tax system. The expenditure tax collected on the recommendation of the Kaldor Committee in 1957-58 had to be withdrawn after 3 years as it did not generate the expected revenues. The attempt to achieve the desired state of redistribution caused the policy makers to design the income tax system with the confiscatory marginal rates. The consequent moral hazard problems led the Direct Taxes Enquiry Committee in 1971 to recommend a significant reduction in marginal tax rates. On the indirect taxes side, a major simplification exercise was attempted by the Indirect Taxes Enquiry Committee in 1972. At the State and local level, there were a number of tax reform committees in different states that went into the issue of rationalization and simplification of the tax system. The motivation for almost all these committees was to raise more revenues to finance ever-increasing public consumption and investment requirements.

The Tax Reforms Committee 1991 (TRC) laid out a framework and a roadmap for the reform of direct and indirect taxes as a part of the structural reform process. The paradigm shift in tax reforms adopted by the TRC was in keeping with the best practice approach of broadening the base, lowering marginal tax rates, reducing rate differentiation, simplifying the tax structure, and adopting measures to make the administration and enforcement more effective.

The important proposals put forward by the TRC included reduction in the rates of all major taxes, i.e., customs, individual, and corporate income and excise taxes to reasonable levels, maintain progressivity but not such as to induce evasion. The TRC recommended a number of measures to broaden the base of all the taxes by minimising exemptions and concessions, drastic simplification of laws and procedures, building a proper information system and computerisation of tax returns, and revamping and modernisation of administrative and enforcement machinery.

It also recommended that the taxes on domestic production should be fully converted into a value added tax, and it should be extended to the wholesale level, in agreement with the States, with additional revenues beyond post-manufacturing stage passed on to the State Governments. The tax reforms witnessed thereafter sought to follow the directions spelt out in this report.

While the TRC laid down the analytical foundations for the reform of the tax system in a liberalised environment, subsequent reports extended the roadmap for reforms to meet the demands of the emerging economic environment in the new millennium.

India’s biggest indirect tax reform has finally arrived–the Goods and Service Tax (GST).

From its first official mention in 2009 when a discussion paper was introduced by the previous United Progressive Alliance Government to the point when the current Government tabled the Constitutional Amendment Bill in the Parliament, building consensus on the GST hasn’t been easy, Its current status is that it has been passed by both the Houses, of Parliament and is now being ratified by the State Assemblies gradually.

Why does India need the GST?

The GST is being introduced not only to get rid of the current patchwork of indirect taxes that are partial and suffer from infirmities, mainly exemptions and multiple rates, but also to improve tax compliances.

The spread of GST in different countries has been one of the most important developments in taxation over the last six decades. Owing to its capacity to raise revenue in the most transparent and neutral manner, more than 150 countries have adopted the GST. With the increase of international trade in services, the GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.

What is GST?

It has been long pending issue to streamline all the different types of indirect taxes and implement a “single taxation” system. This system is called as GST (GST is the abbreviated form of Goods & Services Tax). The main expectation from this system is to abolish all indirect taxes and only GST would be levied. As the name suggests, the GST will be levied both on Goods and Services.

GST was first introduced during the 2007-08 budget session. On 17th December 2014, it was defined as any tax on the supply of goods or services that will subsume CENV AT, service tax, Central Excise duty, additional excise duties, excise duties collected under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, service tax, additional customs duty, countervailing duty or CVD), special additional duty of customs (SAD), central surcharges and cesses, State VAT, State Sales Tax, entertainment tax not collected by local bodies, luxury tax, taxes on lottery, betting, and gambling, tax on the advertisements, State cesses and surcharges related to the supply of goods and services and entry tax not collected by local bodies.

The number one cause for introducing the bill is to pave the way for the Centre to tax sale of goods and the States to tax provision of offerings. The bill further proposes that the significant authorities can have the specific power to levy GST on imports and interstate exchange.

The primary cause for introducing the Bill is to pave the way for the Centre to tax sale of goods and the States to tax provision of services. The Bill further proposes that the Central Government will have the special power to levy the GST on the imports and the interstate trade.

The bill has also recognised the requirement to have a GST council. The Union Finance Minister, the union minister of State is in charge of the revenue or finance, and the minister is in charge of the Finance or Taxation or any other Minister who are nominated by each of the State Government will constitute the council to make sure that both the Centre and the States are on equal footings.
In addition, the Bill proposes to set up a Dispute Settlement Authority that will look into the disputes between the States and the Centre. The appeals from the authority will directly lie with the Supreme Court.

How is GST applied?

GST is a consumption based tax/levy which is established on the Destination principle. The GST is applied on the goods and services at the place where the final/actual consumption happens. GST is collected on the value-added goods and services at each and every stage of sale or purchase in the supply chain. GST paid on the procurement of the goods and services can be set off against that payable on the supply of goods or services. The manufacturer or the wholesaler or the retailer will pay the applicable GST rate but will claim back through the tax credit mechanism. But being the last person in the supply chain, the end consumer has to bear this tax and so, in many respects, GST is like a last-point of the retail tax. GST is going to be collected at point of Sale.

The GST is an indirect tax which means that the tax is passed on till the last stage wherein it is the customer of the goods and services who exposes the tax. This is the case even today for all the indirect taxes but the difference under the GST is that with the streamlining of the multiple taxes the final cost to the customer will corne out to be lower on the elimination of double charging in the system.

Benefits of CST Bill implementation

• The tax structure will be made inadequate and simple

• The entire Indian market will be a unified market which can translate into lower the business costs. It can facilitate the seamless movement of goods across different states and reduce the transaction on the costs of businesses.

• It is good for export oriented businesses because it is not applied for the goods/services which are exported outside India.

• In the long run, the lower tax burden can translate into the lower prices on goods for the consumers.

• The suppliers, manufacturers, wholesalers and retailers are able to recover the GST acquired on the input of the costs as tax credits. This reduces the cost of doing the business, hence enabling the fairer prices for the consumers.

• It can bring more transparency and better compliance.

• Number of departments i.e., tax departments will reduce which in turn can lead to less corruption.

• More the business entities will come under the tax system hence widening the tax base. This can lead to better and more tax revenue collections.

• Companies which are under the unorganised sector will come under the tax regime.

Role of tax professionals

Throughout the world, the Tax Professionals includes Chartered Accountants and lawyers who majorly practice in the field of tax along with their technical expertise and professional and ethical training which play a vital role in assisting the client and the employer taxpayers regarding the tax obligations. At one extreme, it is clear that the tax evasion which is illegal can be convicted by all the parties and no professional accountant can ever be associated with it. On the other hand, leveraging tax incentives in the way that they are proposed by the Governments is certainly appropriate. Between the two extremes lies the complex question of tax avoidance, which is by definition legal. This poses a difficult dilemma for the taxpayers and, hence, for the accountancy profession.

The tax professionals

• Help the employers and the clients to understand their financial and regulatory obligations in relation to the taxation and advise them on how to comply;

• Make sure that their employers and the clients understand the options which are available to them and assist them to be as tax-competitive as possible, hence creating the economic wealth and employment, but also  make sure that they understand the consequences of each option which include the potential reputational consequences;

• Are required to comply with the strict ethical principles, for e.g., the international Code of Ethics or the codes of national professional and the regulatory organisations, and are guided by the fundamental principles of the integrity and the professional behaviour; and

• Play an essential role in combating tax evasion. For example, accountants in public practice help the clients to comply with their legal obligations. If a client is unwilling then an accountant considers the options like resigning from the account; in some circumstances the accountants can have a reporting obligation to revenue or regulatory authorities.

Clearly, accountants play an important role-in the effective tax systems, employer and client education, business advisory, ethics, and more.

Complexibility of TDS on Employees.

Now days there are many problems that are being faced by the accountants in the industry who administer the TDS on the employees of their employer’s organization.

U/s 192 of Income Tax Act stated the employer is required to deduct the tax on the salaries and the allowances paid to its employees on the average rate of tax payable thereon.

While the TDSs is deductible under other provisions of the Income Tax Act on the gross amount paid or credited within a financial year, TDS on the salaries is deductible only on the actual payment to the employee.

Moreover the tax is deductible on the average rate of the tax which is payable by the employee, which varies with every payment of salary, allowance and perquisites as per the terms of employment and the claim of employee for the exemptions, deductions, investments made etc. it becomes a dreary and inconvenient job for the accountant to compute the tax subjection of each and every employee every time and deduct the tax properly.

It is noteworthy here that the Section 220 empowers ITO to call for the explanation from the employer for non associated the deductions of tax from the employees and the demand interest on the short deductions that creates a havoc in the minds of the accountant because the employer always blames him for the default and the employees blame him for not giving all the tax benefits that may be available to the individual cases.

ITO has the power to rectify the claims of the employees collected by the employer and if some claims are disallowed, tax, interested and penalty is recoverable from the employers.

Hence in short the TDS on the employees has abundant scope of concealment, exemptions, valuation of perquisites, provision and payment etc and since the salaries paid and taxes deducted have no interaction as per the quarterly returns uploaded on the income tax website, there is abundant scope of scrutiny, harassment, mismanagement and enquiry by the ITO as well.

Therefore, TDS on salaries and wages under the section 192 should be deductible on the basis of 5 % or 10% of the gross compensation paid to the employee. This will not only reduce the unnecessary work of the accountants but will also make the TDS Returns appropriate and filing of returns by the employees. ITOs will not go for fishing the excursion on the individuals assesses for harassment and compulsion etc. Instead their attention will be business bodies who are not only the largest tax collectors but also the evaders.

Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.

With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.