Non-residents in India are taxed in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or deemed to be received in India.
Background: It’s been two decades since the gift tax was abolished in India. However, as a part of the anti-abuse provisions and to curb tax evasions or aggressive tax planning strategies, provisions for taxation of gifts in the hands of recipients were introduced in the tax laws in 2004. The scope of taxation of such gifts has widened over the years since then.
Current tax provisions
As per the current provisions in tax laws, if any person receives any sum of money, without consideration, exceeding Rs 50,000; any immovable property or any other specified property (such as shares, securities, jewellery paintings, etc.) from any person without consideration, that is taxed as income.
Where consideration is paid for acquiring any immovable property or other specified property but it is inadequate (i.e. consideration is less than stamp duty value / fair market value of the immovable property / specified property), then the difference between such stamp duty value / FMV and consideration paid, is taxed as income on national basis in the hands of recipient provided such difference exceeds Rs 50,000.
In case of an individual, certain exceptions to the above taxation rule for gifts have been carved out. Accordingly, any gift (sum of money, immovable property or specified property) received without consideration or for an inadequate consideration from specified relatives or on the occasion of marriage or under a Will, inheritance, on contemplation of death of the payer is not taxable.
Proposed tax provisions
The Budget 2019 has proposed to consider, effective 5 July 2019, gift of money or property situated in India by a person resident in India to a person outside India as income deemed to accrue or arise in India and accordingly, taxable in India.
Rationale for such proposed amendments
Non-residents in India are taxed in respect of income that accrues or arises in India or is received in India or is deemed to accrue or arise in India or deemed to be received in India. It has been reported that gifts are made by persons resident in India to persons outside India and are claimed to be non-taxable in India as the income does not accrue or arise in India. Thus, in order to plug this loophole in the tax provisions, the proposed amendment is made with immediate effect. This is a prospective amendment, thereby indicating that gifts made by a resident to person outside India were not taxable in the past.
Nonetheless, a recipient, being a tax resident of the overseas country with which India has a tax treaty, may avail the treaty benefits as applicable. However, most of the tax treaties signed by India provides for taxation in India of such gifts, as other income, provided it is arising in India and they are not specifically dealt by any of the other articles.
Loopholes still unplugged
The proposed provisions only refer to gifts made by a resident to a person outside India and it does not cover the scenarios under which a non-resident Indian transfers money / property in India to a person outside India. Accordingly, such gifts would still be outside the purview of tax net, which seems to be an unintentional miss.
Also, the reference to ‘person outside India’ could be open to interpretation in the absence of a specific definition. Can this be interpreted to mean while a person is outside India or as applicable to non-resident in India, or resident overseas as per treaty?
Compliance burden in the hands of a non-resident donee and a resident donor
As the taxability is in the hands of the donee, there would be need for the donee / recipient to obtain PAN and file an income tax return in India where there is a taxable income (amount exceeds Rs 250,000 in case of an individual).
As per the provisions of section 195 of the Income-Tax Act, for any sum paid to a non-resident which is chargeable to tax in India, the payer is required to withhold tax at source. Accordingly, where a tax treaty protection is not available for exemption from taxation of such notional income in India, individual donor would need to obtain TAN and carry out withholding tax compliance under section 195.
In summary, this is a welcome step in providing certainty in the domestic regulation as to the taxability of gifts to persons outside India. Most importantly, this should help provide added ammunition, in the fight against black money, as most round tripping transactions could come under the tax net at the point of origination. However, further simplification of the related compliance needs and addressing the loopholes, as discussed above, would be needed.
(By Suresh Kumar, Director, and Pallavi Dhamecha, Senior Manager with Deloitte Haskins and Sells LLP)