Gift of money made by resident Indians to non-residents who are relatives as per the income-tax law, continue to be exempt, under specified conditions.
Amid the policy initiatives and tax proposals aimed at strengthening the Indian economy, the Union budget 2019 has plugged a loophole by proposing to tax gifts received by non-residents from resident Indians. The move, intended to widen and deepen the tax base, needs to be carefully understood and examined for any future gifts to be made by resident Indians. The provision was further amended when the same was passed by the Lower House (Lok Sabha) of the Indian Parliament.
The proposal intends to tax gift of money exceeding ₹50,000 made by residents to non-residents that were earlier claimed to be outside the ambit of India taxation on the premise that income does not accrue or arise in India. The budget aims at treating non-residents on a par with residents with respect to taxation of gifts. Now, all such gifts of money to non-residents shall be deemed to accrue or arise in India and consequently taxable in India, subject to certain exceptions as discussed below.
Currently, there exists anti-abuse provision in the Income-Tax Act to tax gifts with exceptions carved out for genuine transactions like gifts to close relatives, gifts received on marriage, under a will or inheritance, etc. These exceptions would be applicable even in the context of gifts to non-residents.
This amendment is proposed to be applicable with effect from 5 July. The value of these gifts shall be added to income of the non-resident individuals and taxed as per the progressive slab rate. For example, if the non-resident is already earning taxable income in India of ₹10 lakh and has received a gift of ₹1.1 crore during the year that is not covered within one of the exceptions discussed above, then such gift shall be taxed at the rate of 31.2% (inclusive of cess) in the hands of the non-resident. Further, the newly introduced “super-rich" surcharge at 25% and 37% on the tax amount shall apply to individuals if income including the gift exceeds ₹2 crore and ₹5 crore, respectively. In such case, the effective tax rate would be 39% and 42.7%.
It is pertinent to note that the resident Indian gifting money to a non-resident shall be responsible to withhold tax at source and deposit the same in the government treasury. Tax has to be deposited within seven days of the end of the month in which the tax is withheld.
The resident Indian shall be required to obtain tax deduction account number (TAN) from the Indian tax department, file withholding tax e-statements and issue tax withholding certificate to the non-resident. In case of a delay in deposit of withholding tax/file e-statement/issue certificate, the resident would be subject to interests/penalties/fines, as prescribed under the tax statute.
Further, in order to be eligible to claim credit in his residence country of taxes deducted in India, the recipient should obtain Permanent Account Number (Indian taxpayer’s identification number) and consequently file his tax return in India during the year.
The budget further clarifies that relief, if any, under the tax treaty (Double Taxation Avoidance Agreements) would be available with respect to such income. In general, the benefit under the tax treaty is likely to be available under the article ‘Other Income’ present in a number of treaties.
Interestingly, in some of the tax treaties that India has signed with countries where large Indian diaspora is there like the US, UK, Singapore, etc., the taxation right vests with India (as a source country). It is imperative that each treaty is analyzed in detail to evaluate if any tax is to be paid in context of the gifts.
Besides, tax laws, one should also evaluate the implications, if any under the foreign exchange regulations for gifts from a resident Indian to a non-resident. Thus, one must act with caution to ensure compliance with law and mitigate unnecessary disputes and litigation at a later date.
Nilpa Keval Gosrani contributed to this article.
Vikas Vasal is national leader tax at Grant Thornton India Llp.