the people, are further categorised on the basis of their residence
in the taxable territory i.e. India: The residential status of a
person is necessary to be known, as the tax liability is dependent
on such status. Based on residence, a person can be:
order to be a resident, an individual should have been present in
India in the previous year for at least 182 days. This period of
182 days need not be continuous. Special rules exist for the person
who left India in any earlier year and has been visiting India so
that his total stay in the preceding four years has been at least
365 days. Such a person is considered resident even if in the previous
year under consideration, he stays in India for 60 days only. This
rule, however, does not apply to a member of the crew of an Indian
ship and to a citizen of India or a person of an Indian origin (known
as Non-resident Indian). The residence of such persons is under
all circumstances governed by the general condition i.e., they become
residents only if their stay in any particular year is 182 days
We may take a few instances to make the position clear :-
A person leaves India for the first time on 1st August, 1996 and
remains out of India in the remaining part of the financial year.
His period of stay in India in the previous year 1996-97, being
less than 182 days, he is not a resident for that year.
A person leaves India in December 1996 and continues to remain abroad
in the remaining part of the financial year. His period of stay
in India being more than 182 days, he will be a 'resident' in the
previous year 1996 -97.
A person leaves India in 1993. In the financial year 1993-94 to
1996-97 he visited India several times and the total period of stay
during these four years was 400 days. During the financial year
1997-98, he came to India for total period of 180 days. Although
his stay in India in the financial year 1997-98 is less than 182
days, he becomes a 'resident' by virtue of the fact that his stay
in the preceding four years was more than 365 days and he was in
India for more than 60 days in the year under consideration.
In the above examples, if the person was a member of the crew of
an Indian ship or a citizen of India or a person of Indian origin,
he would not have become a 'resident' for the year 1997-98 since
his period of stay in India in that year was less than 182 days.
'firm' or 'an association of persons', is generally 'resident.'
The only exception is a firm whose control and management during
the year is wholly from outside India.
company is 'resident' if it is an Indian Company. All the companies
formed and registered in India under the Indian Companies Act and
the Government corporations are 'Indian companies'. Even the company
registered outside India can be resident if the control and management
of its affair during that year is wholly from India.
those persons who are not 'residents' are called 'non-residents'.
is a special Category of 'resident' persons, known as 'not ordinarily
residents' in India. This category is carved out of the category
of residents for those who have for a long time remained out of
India and for reason of the prescribed period of stay in any particular
year acquire the status of resident in that year. This is to ensure
that they are not saddled with higher tax liability of a resident
by casual change in status. In order to fall in this category, one
must satisfy either of the following two conditions:
he should not have had the status of 'resident' in nine out of ten
preceding previous years; or
he should not have stayed in India for an aggregate period of 732
days or more in the preceding seven previous years. ,
person, for example, who went out of India in April, 1984 and was
non resident for 84-85 to 92-93 will, even if he remains in India
for 182 days in 93-94 and becomes resident in that year, get this
special category of 'not ordinarily resident' because he was not
'resident' in nine out of preceding ten years.
on the residential status of a tax payer and the place where the
income is earned, the income that is included in the total income
is as under:-
Residential status Nature of income
All income whether earned in India or
2. Not ordinarily resident All income:
i) earned in India; and
ii) all income earned outside India if the same is derived from
a business which is controlled in India or from a profession which
is set up in India.
Non-resident All income earned in India.
a 'resident' is liable to pay tax in India on his 'total world income',
it is possible that he may have to pay tax on his foreign income
in that country also, where it is earned. Such situation leads to
double taxation of the same income -in India and again in the country
where it is earned. To avoid such a situation, the Government of
India has entered into agreements for avoidance of double taxation
with different countries.
Special Provisions Applicable To Non-Residents
person who is non-resident is liable to tax on that income only
which is earned by him in India. Income is earned in India if:
It is directly or indirectly received in India; or
ii) It accrues in India or the law construes it as having accrued
following are some of the instances when the law construes and income
to have accrued in India:
Income from business arising through any business connection in
India (refer Chapter X);
Income from property if such property is situated in India;
Income from any asset or source if such asset or source is in India;
Income from salaries if the services are rendered in India. In such
cases salary for rest period or leave period will be regarded as
earned in India if it forms part of service contract;
Income from salaries payable by the Government to a citizen of India
even though the services are rendered outside India;
Income from dividend paid by an Indian company even if the same
is paid outside India;
Income by way of interest payable by the Government or by any other
person in certain circumstances
Income by way of Royalty if payable by the Government or by any
other person in certain circumstances
Income by way of fees for technical services if such fees is payable
by the Government or by any other person in certain circumstances
following income, even though appearing to be arising in India,
are construed as not arising in lndia:
If a non-resident running a news agency or publishing newspapers,
magazines etc earns income from activities confined to the collection
of news and views in India for transmission outside India, such
income is not considered to have arisen in India.
ii) In the case of a non-resident, no income shall be considered
to have arisen in India if it arises from operations which are confined
to the shooting of any cinematography film. This applies to the
following types of non-residents:
Individual who is not a citizen of India; or
Firm which does not have any partner who is a citizen of India or
who is resident in India; or
Company which does not have any shareholder who is resident in India.
avoid difficulties in working out the net income of a non-resident
from his gross receipts in India, the law provides for taxation
or most of the income of non-resident on 'Gross income basis', which
means that the tax liability is determined on the basis of gross
receipts without going into the question of expenses incurred in
earning those receipts. Such 'Gross receipt basis' taxation operates
in two ways.
By laying down the rate of tax to be applied on gross receipts.
The rates are determined at a figure lower than the general rate
of tax applicable to total income as it takes account of the possible
expenses in earning the income. Such provisions are:
Tax on dividend (other than dividend from domestic companies), interest,
royalty, fee for technical services and income from Units (Sec 115A).
Tax on income and capital gain in respect thereto from units purchased
in foreign currency by off shore funds (Sec 115AB).
Income and capital gain in respect thereto from bonds and shares
purchased in foreign currency or acquired in resulting or amalgamated
company as a result of demerger or amalgamation (Sec 115AD).
Tax on income other than dividend of Foreign Institutional Investors
from Securities & Capital gains arising from their transfer
Income of sportsman or Sports association (Sec 115BBA).
By laying down a percentage to be applied on gross receipts to determine
the net income. The tax is then calculated at the normal rate of
tax on such presumptive income. Such provisions are:
Profits of shipping business (Sec 44B).
ii) Profits of business of providing services etc to be used in
the business of prospecting, exploration or production of mineral
oils (Sec 44BB).
iii) Profits from operation of aircraft (Sec 44BBA).
iv) Profit from business of civil construction etc in certain turnkey
power projects (Sec 44BBB).
a view to attract investment by Non-resident Indians and Indian
Nationals living abroad, special provisions exist providing incentives
in the form of reliefs and concessional tax rate as also simplifying
the tax assessment procedure for such persons. Non-resident Indian
has been defined as an individual, being a citizen of India or a
person of Indian origin, who is not a resident. A person is of Indian
origin if he or his parents or any of his grand parents was born
in undivided India.
for tax avoidance
in a business carried on between a resident and non-resident, the
course of business is arranged in a manner that the business produced
to the resident either no profits or less than the ordinary profits,
the Assessing Officer would determine the profits which may reasonably
be deemed to have been derived there from. This problem arises where
the dealings between the two are not at arms length and arrangement
through transfer pricing is resorted to reduce the profit taxable
in India. In such situations, the assessing officer can take recourse
to estimation of income of any rational basis. Rules 10 and 11 of
Income Tax Rules govern the estimation of income on any rational
basis. Rules 10 and 11 of Income Tax Rules govern the estimation
of such income.
of non-residents through 'Agents' (Sec 163)
non-resident may be assessed to tax in India either directly or
through agents. Persons in India who may be treated as 'agent' of
a non-resident are:
Employee or trustee of the non-resident:
Any person who has any business connection with the non-resident;
Any person from or through whom the non-resident is in receipt of
Any person who has acquired a capital asset in India from the non-resident.
broker in India who has independent dealings with a non-resident
broker acting on behalf of a non-resident principal is, however,
not treated as an 'agent' of the non-resident, if the transactions
between the two brokers are carried on in the ordinary course of
their business. Before any person is treated as an 'agent' of non-
resident, he is given an opportunity of being heard and any representation
from him in the matter is considered.
Tax clearance certificate before departure from India
following categories of persons are required to produce a tax clearance
certificate from the concerned assessing officer prior to their
Persons who are not domiciled in India, and in whose case the stay
in India has exceeded 120 days;
Persons of Indian or non-Indian domicile whose names have been communicated
to the airlines, shipping companies by the Income Tax authorities;
Persons who are domiciled in India at the time of their departure;
Intend to leave India as emigrants; or
Intend to proceed to another country on a work permit with the object
of taking any employment or other occupation in that country; or
In respect of whom circumstances exist, which in the opinion of
the income tax authorities render it necessary for him to obtain
the Tax Clearance Certificate.
certificates are granted where there are no outstanding taxes under
the Income Tax Act, the Excess Profits Tax Act, the Business Profits
Tax Act, the Wealth Tax Act, the Expenditure Tax Act or the Gift
Tax Act against him or where satisfactory arrangements have been
made for the payment of any such taxes. Obtaining guarantee from
the employer of the person leaving the country is one of the methods
of ensuring satisfactory arrangement for payment of taxes. For those
who have to go abroad frequently for employer's work, facility of
one-time Clearance Certificate has been provided to the foreign
employee who has a fixed tenure of service in India or upto five
years on furnishing an employer's guarantee in the prescribed form
for payment of any tax that may be found due against him during
the entire period of contract plus two years.
a view to avoiding dispute in respect of assessment of income tax
liability in relation to the transaction undertaken by or with a
non-resident, a scheme of Advance Ruling has been introduced in
the Income Tax Act, 1961. The Scheme now enables the parties to
obtain, in advance, a binding ruling from the Authority for Advance
Rulings on issues which could arise in determining their tax liabilities.
Helps non-residents in planning their income tax affairs well in
Brings certainty in determining tax liability.
Helps avoiding long drawn and expensive litigation.
advance ruling can be sought on any question of law or fact specified
in the applications in relation to the concerned transaction. Advance
ruling cannot, however, be sought where the question:
Is already pending in the case of the applicant before any income
tax authority, the Appellate Tribunal or any court; or
Involves determination of fair market value of any property; or
Relates to a transaction which is designed prima facie for avoidance
of income tax.
applicant may seek advance ruling by making an application to the
Authority in quadruplicate in the prescribed Form No 34C either
in the person or by an authorised representative or by registered
post. The applicant is entitled to represent his case before the
Authority either personally or through an authorised representative.
If the applicant desires to be represented by an authorised representative,
a duly authenticated document authorising him to appear for the
applicant should be enclosed. The applicant may withdraw his application
within 30 days from the date of filing the application.
application should be accompanied by a fee of Rs2,500 (two thousand
five hundred Indian rupees) through a bank draft drawn in favour
of the Authority for Advance Ruling payable at New Delhi.
advance ruling is required to be pronounced by the Authority within
six months of the receipt of the application.
ruling pronounced by the Authority would be binding in respect of
the transaction(s) in relation to which ruling has been sought:
On the Commissioner and the income tax authorities subordinate to
him in respect of the applicant; and ,
On the applicant who had sought it.
of Tax at Source from payments to Non-residents
person responsible for making any payment (except dividend declared
after 1.6.97) to a non-resident individual or a foreign company
is required to deduct tax at source at the prescribed rate at the
time of credit of such income to the account of the payee or at
the time of payment thereof. If, however, person responsible for
making the payment is the government, public sector bank or public
financial institutions, deduction is to be made at the time of payment
the person responsible for making such payments considers that the
whole of such sum would not be income chargeable in the case of
recipient, he may make an application to the assessing officer to
determine the appropriate proportion of such sum which will be chargeable
to tax and upon such determination tax is required to be deducted
only on the chargeable proportion.
rate at which tax is to be deducted at the source will be the rates
as specified in the Finance Act of the relevant year (refer para
13.3) or the rate specified in any agreement for avoidance of double
tax whichever is beneficial to the assessee.
respect of income of the nature arising to Offshore Funds, tax is
deductible at the rates at which such income is taxable.
certain remittances, the Reserve Bank of India Exchange Control
Manual requires production of a no objection certificate from the
Income-tax authorities. The Central Board of Direct Taxes, vide
circular No.759 and 767, has simplified the procedure by dispensing
with such requirement.
person making the remittance has only to furnish an undertaking
(in duplicate) addressed to the Assessing Officer which should be
accompanied by a certificate from a Chartered Accountant in the
prescribed form. The undertaking should be submitted to the Reserve
Bank of India or the authorised dealer in foreign exchange who will
forward a copy to the assessing officer.
tax deducted in excess of the required amount is normally refundable
to the non-resident on making a proper claim for it. Sometimes the
non-resident returns the amount in respect of which tax was deducted
or, circumstances occur in which tax is found to be non-deductible
or, in which tax is found to have been deducted in excess and the
non-resident is either not able to claim refund or does not show
initiative in claiming such refund. In such cases, the CBDT has
by circular No.790 dated 20.4.2000 permitted refund of excess tax
to the person making the deduction.
the provisions of the Income Tax Act, tax payers are required to
file their returns of income for the assessment year 1994-95 and
subsequent years on or before the dates mentioned below:-
Where the assessee is a company, the 30th day of November of the
Where the assessee is a person, other than a company
in a case where the accounts of the assessee are required under
the I. T. Act or any other law to be audited or where the report
of an accountant is required to be furnished under section 8OHHC
or section 80HHD or where the prescribed certificate is required
to be furnished under section 80R, 80RR or section 80RRA or in the
case of a cooperative society, the 31st day of October of the assessment
in a case where the total income includes any income from business
or profession, and there is no requirement of getting the accounts
compulsorily audited or of furnishing a report or certificate as
mentioned in (i) above, the 31st day of August of the assessment
in any other case, the 30th day of June of the assessment year.
of Default of Delay
in furnishing the return attracts charge of interest at the rate
of 1.5 per cent, for every month or part of a month for the period
of delay on the amount of tax found due on the processing of return
or on regular assessment after giving credit for advance tax and
tax deducted at source. In case of failure to file the return such
interest is to be calculated upto the date of best judgement assessment
under sec. 144.
person liable to tax is required to file a return of income with
the Assessing Officer having jurisdiction over his case. The return
forms for the purpose can be obtained from any Income Tax Office
or from a specified Post Office. The assessee before filing the
return is expected to compute the tax on his returned income by
way of self-assessment and if there is any additional liability
of tax, the assessee is required to pay the same. The unpaid tax
if any is recovered according to the procedure specified in the
the convenience of non-residents liable to Indian Income Tax, Non-
residents Circles have been created in big cities namely, Mumbai,
Delhi, Calcutta, Chennai, Cochin and Ahmedabad. Any person who is
a non-resident and has not yet been assessed to tax any where in
India, may file his income tax return in any of the above mentioned
Non-resident Circles. However, once he files return in any of these
Circles, Jurisdiction over his case will continue to be with circle
unless it is changed under orders of the appropriate authority.
of Tax prior to filing of return
payers whose total income is likely to be chargeable to tax for
the assessment year are required to pay tax in advance during the
financial year (April I to March 31) on their estimated current
income, which will be assessable to tax during the next following
financial year called assessment year. The current income for this
purpose means the total income which will be chargeable to tax in
the relevant assessment year. The advance tax is payable in installments
date of installment Amount payable
i) On or before June 15 Not less than fifteen per cent of total
ii) On or before Sept 15 Not less than forty five percent of total
advance tax as reduced by the amount, if any, paid in the earlier
iii) On or before Dec 15 Not less than seventy five per cent of
total advance tax as reduced by the amount, if any, paid in the
iv) On or before March 15 The whole amount of such advance tax as
reduced by the amount or amounts, if any, paid in the earlier installment
B. For Non-Corporate Assessees
i) On or before the Sept 15 Not less than thirty percent of such
ii) On or before Dec 15 Not less than sixty per cent of such advance
tax as reduced by the amount, if any, paid in the earlier installment.
iii) On or before March 15 The whole amount of advance tax as reduced
by the amount or amounts, if any, paid in the earlier installment
The advance tax payable is the tax on the current income minus the
tax deductible at source or collectible out of any income included
in the current income. The provisions for advance tax are not applicable
where the tax payable for the assessment year is less than Rs. 5000/.
the tax payer does not make payment of advance tax voluntarily,
the assessing officer can issue a notice at any time during the
financial year, but not later than the last day of February asking
him to pay the advance tax in specified installments. Such notice
is ordinarily based on the assessed income of the tax payer for
the latest year. The assessee in that case has an option to pay
advance tax on the basis of his own estimate if he considers that
his current income during the relevant accounting period would be
less than the income on the basis of which advance tax has been
demanded from him. The assessing officer can modify his notice of
demand in certain circumstances. Similarly, the assessee can also
revise his estimate any number of times and after adjusting the
amount already paid, if any, pay the balance in installments falling
due after the revised estimate.
of Deferment/Short Payment
Default in making payment as per the installment plan mentioned
in para 13.2 attracts consequence in the form of charge of interest
for deferment at the rate of 1.5 per cent per month for 3 months
on the amount of shortfall from the required percentage in the installments
due on 15th June, 15th September and 15th December. If the advance
tax paid upto the last installment. i.e. 15th March falls short
of the tax payable as per the return of income, interest @ 1.5 per
cent is payable on the amount of shortfall calculated from the date.
In case of failure to pay the advance tax or in case of shortfall
in such payment in relation to 90 per cent of the assessed tax,
a further interest at the rate of 1.5 per cent per month of part
of month is chargeable from First April of the assessment year to
the date of processing of return or the regular assessment on the
amount falling short of the assessed tax.
Deduction of Tax At Source
responsible for paying any income chargeable to tax under the head
'Salaries' is required to compute the tax liability in respect of
such income and deduct tax at source at the time of payment. If
the employee has any other income he can inform the employer in
which case the employer can take that income into consideration
for computing his tax liability. He will not take account of loss
except loss from house property.
Those responsible for paying any income by way of interest on securities
or any other interest are required to deduct tax at source at the
prescribed rates at the time of credit of such income to the account
of the payee or at the time of payment thereof by any mode. W.e.f.
01.07.1995 interest on term deposits with banks is also subject
to such deduction.
Tax is also deductible at source in respect of following income
at the rates noted against each-
Winnings from lottery or crossword puzzle (on amount exceeding Rs.
5,000/-) Rates in force
(ii) Winning from horse race (on amount exceeding Rs.2,500/- ) Rates
(iii) Payment to contractors and sub contractors (on amount exceeding
Rs. 20,000/- ).
a) Advertising 1 per cent
b) Others 2 per cent to Contractors;
1 per cent to sub-contractors
Insurance Commission Rates in force.
(v) Payment to non-resident Sportsman or Sports Association 10 per
(vi) Payment on repayment of Deposits under N.S.S. (on amount. exceeding
Rs. 2,500A) 20 per cent
(vii) Payment on repurchase of Units 20 per cent
(viii) Commission on sale of lottery tickets 10 per cent
(ix) Rent (on amount exceeding Rs. 1,20,000/- ) 15 per cent if payee
is individual of HUF;
20 per cent in other cases.
(x) Fees for professional or technical services (on amount exceeding
Rs. 20,000/-) 5 per cent
Deduction is required to be made only if the payer is a person other
than individual or HUF
Tax collection at Source
certain cases tax is to be collected at source from the buyer, by
the seller at the point of sale. Such tax collection is to be made
by the seller at the time of debiting the amount payable by the
buyer to the account of the buyer at the time of receipt of such
amount from the said buyer, whichever is earlier. Such type of cases
and the rate of collection of Tax at Source are as follows:-
No. Nature of Goods Percentage of collection of tax
(a) Alcoholic liquor for human consumption (other than Indian made
foreign liquor) 15 per cent
(b) Timber obtained under a forest lease 15 per cent