Interest from banks in India to be taxable @ 10%
By: Surendra Bhargava & Ridhi Karan*
V. Ravi Narayanan, a non-resident Indian (NRI), proposed to open a Non-Resident Ordinary (NRO) deposit account with Indian banks with the help of remittances from Saudi Arabia where he resides. He claimed that the interest income arising from that account will be investment income under section 115C of the Income-tax Act (Act) and, accordingly, will attract income-tax at the rate of 20 per cent under section 115E of the Act. However, Indian banks did not regard this type of income as investment income and treat it as other income and deduct tax at the rate of 30 per cent. Therefore, the applicant sought advance ruling of the Authority for Advance Rulings (AAR) ((2008) 168 TAXMAN 65 (AAR - NEW DELHI)) on the questions as to whether (1) the NRO deposit acquired with convertible foreign exchange can be treated as a foreign exchange asset under section 115C; (2) whether the interest on such NRO deposit can be treated as investment income under section 115C and is taxable at 20 per cent as per section 115E and (3); at what rate tax is required to be deducted at source by the person responsible for paying such interest. Income tax Commissioner, in his comments, stated that though NRO deposit is acquired with convertible foreign exchange, its maturity proceeds are not repatriable and, hence, such a deposit does not constitute a foreign exchange asset under section 115C and as such, interest earned on it did not qualify as investment income under section 115C but the same has to be treated as other income and, therefore, the banks are right in deducting tax at the rate of 30 per cent. The comments of the Commissioner were forwarded to the applicant by AAR who submitted his rejoinder in which he stated that section 115C nowhere says that the asset acquired should be repatriable; and that the only condition attached is that the asset should have been acquired with the help of convertible foreign exchange.
2. AAR, thereafter, gave the following ruling:
(i) the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as ‘foreign exchange asset’ under clause (b) of section 115C of the Act;
(ii) income by way of interest earned from the said NRO deposit shall be treated as ‘investment income’ under clause (c) of section 115C and shall be liable to be taxed at the rate of twenty per cent under section 115E; and
(iii) the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of twenty per cent.
1. Part (iii) of the question was, at what rate tax is required to be deducted at source by the person responsible for paying such interest (on NRO deposit). It seems that neither the applicant nor the Commissioner made personal appearance before AAR. For this reason, the applicability of Indo-Saudi Arbia (SA) double taxation avoidance agreement (DTAA) could not be considered to the facts of the case. We are considering whether any more benefit was available to the applicant under the DTAA. It has been stated in the ruling that the applicant was a resident of SA. Hence, SA DTAA was applicable to him.
2. Article 11 of the DTAA deals with ‘income from debt-claims’, which is reproduced below:
Article 11 : Income from debt-claims - 1. Income from debt-claims arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such income from debt-claims may also be taxed in the Contracting State in which it arises and according to the laws of that Contracting State, but if the beneficial owner of the income from debt-claims is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the income from debt-claims.
4.The term Income from Debt-Claims as used in this Article means income from Government securities and bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits; and debt-claims of every kind as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises. Penalty charges for late payment shall not be regarded as income from debt-claims for the purpose of this Article.
5. Facts show that income was interest on bank deposits. Question is whether such interest is covered by para 4 of the above Article.
6.1 Similar questions arose before AAR, under Indo-UAE DTAA in the case of Abdul Razak A.Meman, 276 ITR 306. One of the question raised was:
(6) Whether in terms of art. 11 of treaty between India & UAE., income received/receivable by the applicant in India by way of Interest on debentures/bonds and deposits with Bank and Companies is liable to tax in India at 12.5%?
6.2 AAR gave the following ruling to the above question:
Question No. (6) : in terms of article 11 of the treaty between India and UAE read with Circular No. 734 dated 24.1.1996 issued by the CBDT, income receivable by the applicant in India by way of interest or dividends on bonds and deposits with banks and companies are liable to be taxed at the rates mentioned in the circular at 12.5 per cent of the gross amount of the interest received
6.3 The relevant provision in UAE DTAA is as under:
Article 11 : Interest - 1.Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 12.5 per cent of the gross amount of the interest.
4.The term ‘interest’ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as income from debt-claims for the purpose of this Article.
7. Let us compare the definition of interest in both DTAAs, although the phrase used being different.
SA
4.The term Income from Debt-Claims as used in this Article means income from Government securities and bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits; and debt-claims of every kind as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises.
UAE:
4.The term ‘interest’ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
8. For the purposes of our case, there is no difference between the two definitions. Rather, use of phrase ‘as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises’, shows that bank interest arising in India, is specifically covered under SA DTAA.
9. Section 2(28A) of the Act defines ‘interest’ to mean ‘interest payable in any manner in respect of moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
10. Thus, there can not be any manner of doubt that, para 4 of Article 11 of SA DTAA would cover interest on NRO deposit accounts with Indian banks, in dispute in the case before AAR.
11. If a view is taken that since interest from NRO deposits is not covered under the definition of income from debt claim is not covered under Article 11 of the SA DTAA, than, such income would be taxable under the residuary clause of the DTAA. Article 22 (1) dealing with ‘Other Income’ states “items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State.” Consequently, income from NRO deposits would be taxable only in the Kingdom of Saudi Arabia and not in India.
12. Central Board of Direct Taxes, the apex body of the Income tax department has clarified ‘applicable rates of taxes under the Double Taxation Avoidance Agreement betwen India and the United Arab Emirates’, in its circular No. 734, dated 24-1-1996.Relevant extract is reproduced below:
1. It has been represented by some Non-Resident Indians in the United Arab Emirates (UAE) that the banks and the U.T.I. have been deducting tax at source on interest and dividend incomes at rates higher than those provided in the Double Taxation Avoidance Agreement between India and the United Arab Emirates. This has forced the Non-Resident Indians to seek remedy by way of refunds. It also appears that in each of such cases where refund was due and where decision on the applicability of the DTAA was involved, they had been advised to file a petition before the Authority for Advance Rulings.
2. The Board in its Circular No. 728, dated 30th October, 1995 (see Annex) have already clarified that in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee.
3. Once again it is clarified that in respect of payments to be made to the Non-Resident Indians at the UAE, tax at source must be deducted at the following rates :
(ii) Interest :
(a) 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution.
(b) 121/2% of the gross amount of the interest in all other cases.
3. It is essential that the above rates which are enshrined in the DTAA between India and the UAE are strictly adhered to so as to avoid unnecessary harassment of the taxpayers.
13. In circular no 728, Board has issued the following clarification:
3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.
14. In circular 333 of 1982 and in the case of Azadi Bacho Andolan 132 (SC) Taxman 373 it has been held that the provisions of domestic tax laws of the state or the Treaty provisions which ever are more beneficial to a person would be applicable. Therfore, income of interest from NRO account would be taxable @10% and not 20%.
15. It seems that AAR should have decided the applicability of the DTAA, while giving ruling on part (iii) of the question, at what rate tax is required to be deducted at source by the person responsible for paying such interest. Commissioner, while giving his comments, called for by AAR, was duty bound to point it out. Board’s circular, no 14 of April 11, 1955, reproduced below, mandates such duty on Income tax authorities, including the Commissioner.
Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department; for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee on whom it was imposed by the law, officers should:
a. draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
b. freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.
16. Persons making deposits in NRO account in India should insist the bank to deduct tax @ 10% only. AAR may consider, suo moto, modifying its ruling in the case of V Ravi Narayanan, so that NRIs are not put to unnecessary hardship. * Bhargava was earlier with Income tax Department and presently a tax consultant. Ridhi Karan is FCA and is also in tax practice. They can be contacted at s_bhargava2005@rediffmail.com & ridhikaran@yahoo.co.uk
By: Surendra Bhargava & Ridhi Karan*
V. Ravi Narayanan, a non-resident Indian (NRI), proposed to open a Non-Resident Ordinary (NRO) deposit account with Indian banks with the help of remittances from Saudi Arabia where he resides. He claimed that the interest income arising from that account will be investment income under section 115C of the Income-tax Act (Act) and, accordingly, will attract income-tax at the rate of 20 per cent under section 115E of the Act. However, Indian banks did not regard this type of income as investment income and treat it as other income and deduct tax at the rate of 30 per cent. Therefore, the applicant sought advance ruling of the Authority for Advance Rulings (AAR) ((2008) 168 TAXMAN 65 (AAR - NEW DELHI)) on the questions as to whether (1) the NRO deposit acquired with convertible foreign exchange can be treated as a foreign exchange asset under section 115C; (2) whether the interest on such NRO deposit can be treated as investment income under section 115C and is taxable at 20 per cent as per section 115E and (3); at what rate tax is required to be deducted at source by the person responsible for paying such interest. Income tax Commissioner, in his comments, stated that though NRO deposit is acquired with convertible foreign exchange, its maturity proceeds are not repatriable and, hence, such a deposit does not constitute a foreign exchange asset under section 115C and as such, interest earned on it did not qualify as investment income under section 115C but the same has to be treated as other income and, therefore, the banks are right in deducting tax at the rate of 30 per cent. The comments of the Commissioner were forwarded to the applicant by AAR who submitted his rejoinder in which he stated that section 115C nowhere says that the asset acquired should be repatriable; and that the only condition attached is that the asset should have been acquired with the help of convertible foreign exchange.
2. AAR, thereafter, gave the following ruling:
(i) the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as ‘foreign exchange asset’ under clause (b) of section 115C of the Act;
(ii) income by way of interest earned from the said NRO deposit shall be treated as ‘investment income’ under clause (c) of section 115C and shall be liable to be taxed at the rate of twenty per cent under section 115E; and
(iii) the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of twenty per cent.
1. Part (iii) of the question was, at what rate tax is required to be deducted at source by the person responsible for paying such interest (on NRO deposit). It seems that neither the applicant nor the Commissioner made personal appearance before AAR. For this reason, the applicability of Indo-Saudi Arbia (SA) double taxation avoidance agreement (DTAA) could not be considered to the facts of the case. We are considering whether any more benefit was available to the applicant under the DTAA. It has been stated in the ruling that the applicant was a resident of SA. Hence, SA DTAA was applicable to him.
2. Article 11 of the DTAA deals with ‘income from debt-claims’, which is reproduced below:
Article 11 : Income from debt-claims - 1. Income from debt-claims arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such income from debt-claims may also be taxed in the Contracting State in which it arises and according to the laws of that Contracting State, but if the beneficial owner of the income from debt-claims is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the income from debt-claims.
4.The term Income from Debt-Claims as used in this Article means income from Government securities and bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits; and debt-claims of every kind as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises. Penalty charges for late payment shall not be regarded as income from debt-claims for the purpose of this Article.
5. Facts show that income was interest on bank deposits. Question is whether such interest is covered by para 4 of the above Article.
6.1 Similar questions arose before AAR, under Indo-UAE DTAA in the case of Abdul Razak A.Meman, 276 ITR 306. One of the question raised was:
(6) Whether in terms of art. 11 of treaty between India & UAE., income received/receivable by the applicant in India by way of Interest on debentures/bonds and deposits with Bank and Companies is liable to tax in India at 12.5%?
6.2 AAR gave the following ruling to the above question:
Question No. (6) : in terms of article 11 of the treaty between India and UAE read with Circular No. 734 dated 24.1.1996 issued by the CBDT, income receivable by the applicant in India by way of interest or dividends on bonds and deposits with banks and companies are liable to be taxed at the rates mentioned in the circular at 12.5 per cent of the gross amount of the interest received
6.3 The relevant provision in UAE DTAA is as under:
Article 11 : Interest - 1.Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 12.5 per cent of the gross amount of the interest.
4.The term ‘interest’ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as income from debt-claims for the purpose of this Article.
7. Let us compare the definition of interest in both DTAAs, although the phrase used being different.
SA
4.The term Income from Debt-Claims as used in this Article means income from Government securities and bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits; and debt-claims of every kind as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises.
UAE:
4.The term ‘interest’ as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
8. For the purposes of our case, there is no difference between the two definitions. Rather, use of phrase ‘as well as all other income included as income from moneys lent under the taxation laws of the State in which the income arises’, shows that bank interest arising in India, is specifically covered under SA DTAA.
9. Section 2(28A) of the Act defines ‘interest’ to mean ‘interest payable in any manner in respect of moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
10. Thus, there can not be any manner of doubt that, para 4 of Article 11 of SA DTAA would cover interest on NRO deposit accounts with Indian banks, in dispute in the case before AAR.
11. If a view is taken that since interest from NRO deposits is not covered under the definition of income from debt claim is not covered under Article 11 of the SA DTAA, than, such income would be taxable under the residuary clause of the DTAA. Article 22 (1) dealing with ‘Other Income’ states “items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State.” Consequently, income from NRO deposits would be taxable only in the Kingdom of Saudi Arabia and not in India.
12. Central Board of Direct Taxes, the apex body of the Income tax department has clarified ‘applicable rates of taxes under the Double Taxation Avoidance Agreement betwen India and the United Arab Emirates’, in its circular No. 734, dated 24-1-1996.Relevant extract is reproduced below:
1. It has been represented by some Non-Resident Indians in the United Arab Emirates (UAE) that the banks and the U.T.I. have been deducting tax at source on interest and dividend incomes at rates higher than those provided in the Double Taxation Avoidance Agreement between India and the United Arab Emirates. This has forced the Non-Resident Indians to seek remedy by way of refunds. It also appears that in each of such cases where refund was due and where decision on the applicability of the DTAA was involved, they had been advised to file a petition before the Authority for Advance Rulings.
2. The Board in its Circular No. 728, dated 30th October, 1995 (see Annex) have already clarified that in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, tax should be deducted at the rates provided in the Finance Act of the relevant year or at the rates provided in the DTAA, whichever is more beneficial to the assessee.
3. Once again it is clarified that in respect of payments to be made to the Non-Resident Indians at the UAE, tax at source must be deducted at the following rates :
(ii) Interest :
(a) 5% of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution.
(b) 121/2% of the gross amount of the interest in all other cases.
3. It is essential that the above rates which are enshrined in the DTAA between India and the UAE are strictly adhered to so as to avoid unnecessary harassment of the taxpayers.
13. In circular no 728, Board has issued the following clarification:
3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.
14. In circular 333 of 1982 and in the case of Azadi Bacho Andolan 132 (SC) Taxman 373 it has been held that the provisions of domestic tax laws of the state or the Treaty provisions which ever are more beneficial to a person would be applicable. Therfore, income of interest from NRO account would be taxable @10% and not 20%.
15. It seems that AAR should have decided the applicability of the DTAA, while giving ruling on part (iii) of the question, at what rate tax is required to be deducted at source by the person responsible for paying such interest. Commissioner, while giving his comments, called for by AAR, was duty bound to point it out. Board’s circular, no 14 of April 11, 1955, reproduced below, mandates such duty on Income tax authorities, including the Commissioner.
Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a taxpayer in every reasonable way particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department; for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee on whom it was imposed by the law, officers should:
a. draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
b. freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs.
16. Persons making deposits in NRO account in India should insist the bank to deduct tax @ 10% only. AAR may consider, suo moto, modifying its ruling in the case of V Ravi Narayanan, so that NRIs are not put to unnecessary hardship. * Bhargava was earlier with Income tax Department and presently a tax consultant. Ridhi Karan is FCA and is also in tax practice. They can be contacted at s_bhargava2005@rediffmail.com & ridhikaran@yahoo.co.uk
No comments:
Post a Comment