India is noted to be governed by its own set of taxation rules under IT Act 1961. An Indian citizen has its own income source, located within India and made to be taxable as per the IT Act provisions. But, what about the same person if the source of income is outside India? If so, then is that person bound to pay income tax in India or outside? It is one major question that foreign investment in Indian company will actually get lot of time and the answer lies within Income Tax Act only.
Income shares as owned by foreign firm:
Owning any share in foreign company is always noted to be an investment made by person to earn from those shares. It is one such income source, whose earning will get taxed. There are two income types generated from such category.
1. Income as received from shares by transfer:
Income procured from shares by ways of transfer is well covered under Capital Gains of IT Act. It is a major part of foreign investment in India.
• As per the Section 45, any gain rising from transferring capital asset affected in previous year will be made chargeable under IT Act. These capital gains can be short term or long term gains.
So, the income as procured from transferring shares as held by Indian resident in foreign company remains taxable under ‘capital gains” and the amount to be charged will depend upon the period, within which it will get sold after purchase.
2. Dividend as associated with the shares:
As per Section 4 of IT Act, IT is charged on “total income” of any person. Then you have section 5, which states that tax will get charged on total income, no matter whatever the source might be.
• Section 10 of the Act states you a list of the income, to be not included in total income basis under taxation.
• Section 10 (34) of IT Act clearly states that income, received by tax dividend from any Indian firm, is not taxable.
So, income that the person has received as way of dividend on foreign company’s shares is taxable. So, according to the present scenario, the person gaining dividend on shares in foreign firm will be asked to pay taxes under “Income from other sources” category. Get in touch with foreign direct investment experts to learn more about the taxation parts in details.
Liability to get taxed in India or outside:
IT Act section 5 mentions that total income of previous year of a person residing in India will include all income from any source derived. Whether the amount is received or deemed to be received in India within a year, it will be included under the taxable count.
• In case, any person is not resident in India, then the income which is earned by him outside India will not be included unless it has been derived from a firm, controlled in India.
• Furthermore, the Section 5(1) (c) mentions clearly that the Indian person who resides in this country and is earning income outside India will be held liable to be taxed in India.
• In current scene, the income source is shares owned in foreign firm by a person, residing in India. So, the person is held liable to be taxed in this country. According to the section, the earnings from shares will also get added in total income of previous year, without thinking about the source much.
A person will be stated to be an Indian resident if he stays for a period of 182 days or more in India the previous year. He will also be an Indian resident if he has been in India for a period of 60 days or more the previous year. To know if you really need to pay taxes to Indian government, the best tax lawyers in India are here to help. After learning about your situation in detail, they will be able to offer the best option.
Learning about FDI in india is no joke as it comprises of some major steps to follow. There is nothing to worry about as best tax lawyers are here to help you understand more about the foreign direct investment rules, played in India.
Amy Jones is the lead legal expert at Ahlawat & Associates-law firm in India. She is a passionate writer and loves to help people in all aspects of law.