I. Introduction
There is sometimes a misconception that a non-resident is required to file a tax return in India only if it has a taxable presence in India in the form of a permanent establishment (PE), and that it is not necessary to file a return if the income derived by the non-resident is either exempt from tax under an applicable tax treaty or if an Indian payer has withheld tax on the income. Two rulings issued by the Authority for Advance Rulings (AAR) in 2012 have sparked a fresh debate on the filing requirement. This article provides an overview of the tax return filing requirements in India, the current policy of the government and the consequences of failure to file a return.
II. Domestic law background
A. Determining taxability of income in India
A non-resident is taxable in India on income that accrues or arises in India, is deemed to accrue or arise in India or is received or deemed to be received in India. Under the Indian Income-tax Act, 1961, a taxpayer can opt to be governed by domestic tax law or the provisions of an applicable tax treaty, whichever is more beneficial to the taxpayer.
B. Annual income tax return
The circumstances in which a company (including a non-resident company) is required to file annual income tax returns in India are very extensive. The typical situations in which a non-resident is required to file a return are where:
• the non-resident has a taxable presence in India in the form of a PE;
• the non-resident wishes to claim a refund of tax withheld on income earned in India;
• the non-resident is an investor, such as a foreign financial institution, that earns India-source income in the form of dividends, interest, capital gains, etc.;
• the non-resident receives India-source royalties or fees for technical services, regardless of whether tax is withheld on the income;
• the non-resident derives capital gains from the transfer of assets located in India;
• the non-resident is engaged in an offshore transaction involving the indirect, rather than the direct, transfer of shares in an Indian company and the transaction is taxable under Indian law; or
• the non-resident earns any other India-source income.
The annual income tax return must be filed with the tax authorities by the dates overleaf.
C. Failure to file
A number of deterrents are built into India's domestic tax law to discourage noncompliance with the return filing requirements:
• interest is chargeable at a rate of 1 percent for each month or part of a month for which a return is filed late;
• a penalty is imposed if a return is not filed on or before the last day of the financial year in which the return filing due date falls; and
• a penalty is imposed at a rate of 100 percent to 300 percent of the tax sought to be evaded for concealment of income.
The penalties are imposed at the discretion of the tax authorities. The defaulter is also exposed to the risk of prosecution and imprisonment for a term ranging from six months to seven years, based on the amount of tax sought to be evaded.
In addition to the penalties described above, failure to file an income tax return also has ramifications for a taxpayer's ability to carry forward losses. There is also a risk that the tax authorities will re-open tax assessments for the seven years prior to the year in which the failure takes place.
| Person | Due date |
| Category I | |
| Company | 30 September of the assessment year |
| Person other than a company that is subject to audit | |
| Category II | |
| Taxpayer required to submit a transfer pricing report | 30 November of the assessment year |
| Category III | |
| Other taxpayers | 31 July of the assessment year |
III. Precedent
The AAR has issued a number of rulings on the filing obligations of non-residents with respect to income that is not taxable in India as a result of tax treaty relief. (Although these rulings are not binding on other taxpayers, they carry persuasive value.) Over time, the AAR has changed its views on this issue.
In older rulings, the AAR took the position that a non-resident must file an income tax return only if the taxpayer was liable to tax in India (e.g.Veneburg Group, Dana Corporation, Amiantit International Holdings Limited). The AAR subsequently held (VNU International B.V.) that a company (including a foreign company) is required to file a return regardless of whether it earns income or incurs a loss.
In the VNU case, the AAR noted that Indian law specifically sets out instances in which a non-resident is not required to file a return and that this provision does not include the situation in which a non-resident is not taxable in India as a result of tax treaty protection. According to the AAR, if a state has the power to tax, the argument cannot be accepted that if the resulting income is nil, there is no liability to file a tax return.
The AAR issued two rulings in 2012 (Castleton Investment Limited andSmithkline Beecham Port Louis Limited) that addressed the tax return filing obligations of a non-resident. In both cases, the shares of an Indian company held by a Mauritius company were transferred to another non-resident outside India pursuant to a group restructuring.
The principal issue before the AAR was the taxability of the capital gains arising on the sale of the shares. The AAR held that the capital gains were taxable under Indian domestic tax law, but that relief from tax was available under the India-Mauritius tax treaty. With respect to the tax return filing requirement, the AAR observed that Indian domestic tax law requires every person whose total taxable income exceeds the maximum amount not chargeable to tax to file a return.
The AAR also remarked that if a person intends to claim relief under the tax treaty, a claim must be made in the tax return or at the time of tax audit proceedings. The AAR held that the obligation to file a return does not vanish simply because a taxpayer is entitled to the benefits of a tax treaty and that the taxpayer must demonstrate to the tax authorities that it is eligible for treaty benefits, thus emphasising the need to file a return.
IV. Government initiatives
Alongside the change in the AAR's position with regard to the filing obligations of non-residents, the Indian government has been taking steps to target tax evasion and ensure that tax returns are filed.
A number of foreign companies have obtained a Permanent Account Number (PAN) in India to reduce the withholding tax burden on payments received from Indian customers. The domestic tax laws mandate that a company must furnish its PAN to the payer, or the withholding tax rate will be 20 percent rather than the 10 percent/15 percent rate that applies in most of India's tax treaties.
Press reports indicate that in February 2013, the Indian Finance Ministry initiated a business intelligence project to identify PAN holders that have not filed their tax returns. Information on PAN holders was collated from annual information return data, withholding tax returns and data received from the financial intelligence team.
As a result, the Finance Ministry issued letters to approximately 105,000 foreign companies that had not filed income tax returns. Recent press reports indicate that the ministry is in the process of issuing letters to another 70,000 companies and that a compliance management cell has been set up to follow up. This cell will track return filing and the payment of any tax due.
V. Concluding remarks
Recent rulings mandating that non-residents must file returns even if the income concerned is not taxable in India as a result of the application of a tax treaty leave no doubt that the AAR has changed its earlier, more relaxed position on this issue.
Taken together with the Government's initiative to track down non-residents that fail to comply with the tax return filing requirement, the AAR rulings clearly indicate that non-residents doing business with India and claiming non-taxability of income in India consequent to treaty relief will have to pay greater attention to their Indian filing requirements. Non-residents claiming tax treaty benefits in respect of India-source income should claim such benefits by filing an annual income tax return if they wish to avoid interest, penalties or even prosecution, and should also remember that they are required to obtain tax residence certificates from their countries of residence to support their claims to treaty relief. There are likely to be unfortunate consequences for those who fail to comply.
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