Widening the scope of section 206C to include TCS on foreign remittance through Liberalised Remittance Scheme (LRS) and on selling of overseas tour package as well as TCS on sale of goods over a limit.

Section 206C of the Income Tax Act provides for the collection of tax at source (TCS) on business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1) of the said section, provides that every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of certain goods a sum equal to specified percentage, of such amount as income-tax.

In order to widen and deepen the tax net, the finance bill 2020 has proposed an amendment to section 206C to levy 5% TCS on overseas remittance and for sale of overseas tour package

1. TCS on overseas remittance

The government in the budget proposed to impose a tax on remittances after a sample survey by the income tax department showed that many those sending out money had not filed tax returns. Of the 5,026 selected cases of foreign remittance, data showed that 1,807 did not file returns. Last year, US14 billion was sent out using the liberalised remittance scheme. This figure was less than US1 billion in 2009- 2010.

According to the budget provision, any authorised dealer* receiving an amount or an aggregate of amounts of 7,00,000 or more in a financial year for remittance out of India under the liberalised remittance scheme is required to deduct 5% TCS. In cases where such remittances not supported by PAN or Aadhaar the TCS rate would be 10%.

Under the liberalised remittance scheme, individuals are allowed to send out $250,000 in a year.

The following are the purposes permitted under LRS.

Current account transactions

1. Private visits to any country (except Nepal and Bhutan)
2. Gift or donation
3. Going abroad for employment
4. Emigration
5. Maintenance of close relatives abroad
6. Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up Expenses in connection with medical treatment abroad Studies abroad
7. Any other current account transaction which is not covered under the definition of current account in FEMA 1999.

Capital account transactions

1. opening of foreign currency account abroad with a bank.
2. purchase of property abroad.
3. making investments abroad- acquisition and holding shares of both listed and unlisted overseas company or debt instruments; 5acquisition of qualification shares of an overseas company for holding the post of Director; acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration; investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes;
4. setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August 05, 2013) outside India for bonafide business subject to the terms & conditions stipulated in Notification No FEMA.263/ RB-2013 dated March 5, 2013.
5. extending loans including loans in Indian Rupees to Non-resident Indians (NRIs) who are relatives.

*“authorised dealer” is proposed to be defined to mean a person authorised by the Reserve Bank of India under sub-section (1) of section 10 of Foreign Exchange Management Act, 1999 to deal in foreign exchange or foreign security.

2. TCS on overseas tour package

A seller of an #overseas tour program package who receives any amount from any buyer, being a person who purchases such package, shall be liable to collect TCS at the rate of 5%. In non-PAN/ Aadhaar cases the rate shall be 10%.

#Overseas tour program package is proposed to be defined to mean any tour package which offers visit to a country or countries or territory or territories outside India and includes expenses for travel or hotel stay or boarding or lodging or any other expense of similar nature or in relation thereto.

Meaning of Residential Status:

The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year.

Also, to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we will discussed about how the residential status of an individual taxpayer can be determined for any particular financial year and the proposed amendment by finance act 2020

Provision before amendment

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

1. A resident
2. A resident not ordinarily resident (RNOR)
3. A non-resident (NR)

Resident

Section 6(1) provides for situations in which an individual shall be considered to be resident in India in a financial year if fulfils any of the below conditions:

1. He stays in India for a year is 182 days or more or
2. He has been in India for a period of 365 days or more within 4 years preceding that previous year and he is in India for a period 60 days or more in that financial year.

Explanation 1 to section 6(1) provides exception to clause (b) to section 6(1) as follows

1. being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India, the words 60 days shall be replaced by 182 days
2.  being a citizen of India, or a person of Indian origin who, being outside India, comes on a visit to India in any previous year, the words 60 days shall be replaced by 182 days

Amendment vide Finance act 2020

Finance Act 2020 proposed to reduce the number of days of 182 days for person comes on a visit to India to 120 days under explanation 1(b) to section 6(1).

Consequently, this amendment is only applicable to person who comes on a visit to India being citizen or resident in India the number of days shall be counted 120 for stays in India.

A resident not ordinarily resident (RNOR)

Section 6(6) provides the conditions for Resident but not ordinary resident as follows:

1. an individual who has been a non-resident in India in 9 out of the 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less; or
2. a Hindu undivided family whose manager has been a non-resident in India in 9 out of the 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less.

Amendment vide Finance act 2020

It is proposed to amend the said clause (6) to relax the said conditions whereby an individual or the manager of HUF has been non-resident in India in 7 out of 10 previous years preceding that year to be “not ordinarily resident” in that year.

Deemed Resident – Moving towards citizenship-based taxation

• The government has taken cognizance with respect to individuals who arrange their physical presence in India and abroad in such a manner that they do not qualify as tax residents in any country or jurisdiction during a given tax year.
• Accordingly, in order to discourage this, a new clause  is to be inserted in Section 6 to provide that an Indian citizen, who is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature, shall be deemed to be a ‘Resident’ in India.
• Further CBDT had come up with clarification vide notification to bring more clarity on above clause as follows:
  • It is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession

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