Frequently Asked
Tax Questions by Qualified Foreign Investors (QFIs)*
Press release,
dated 26-12-2012
Q.1. What is
Permanent Account Number (PAN) Card?
Ans: Permanent
Account Number (PAN) is a ten-digit alphanumeric number, issued by the Income
Tax Department of India to any "person" to facilitate him in making
tax payments filing, returns and claiming refunds. The number, along with other
relevant details, is printed on a card called PAN card.
Q.2. Are QFIs
required to obtain PAN Card to comply with tax norms in India?
Ans: Yes. Under the
current provisions, QFIs would be required to obtain PAN card. The process of
obtaining a PAN card is simple, and user friendly. An application can be filed
by a foreign investor online and the process can be completed within 2 to 3
weeks.
Q.3. What are
the benefits to QFIs of having a PAN Card?
Ans: QFIs who have a
PAN card would be eligible for tax deduction at source (TDS) as per the rates
applicable in the Double Taxation Avoidance Treaty (DTAA) of the country of
which the QFI is a resident, if it is more beneficial than the rate prescribed
under the domestic law. If a QFI has not obtained a PAN card it would be
subject to a higher rate of tax deduction under Section 206 AA of Income Tax
Act, 1961.
Q.4. How QFIs
can apply for a PAN Card?
Ans: In order to
facilitate QFIs in applying for a PAN as well as to comply with Know your
Customer (KYC) norms of the Securities Exchange Board of India (SEBI), a
combined form (FORM 49 AA) has been notified by the Central Board of Direct Tax
(CBDT). Form 49 AA and detailed instructions regarding how it is to be filled
up are available at :
Q.5. Can QFIs
make an On-line application for PAN Card?
Ans: Yes, application
for allotment of PAN can be made online through the Internet. Further, requests
for changes or correction in PAN data or request for reprint of PAN card (for
an existing PAN) may also be made through the Internet. Online application can
be made either through the portal of National Securities Depository Limited
(NSDL) (https://tin.tin.nsdl.com/pan/index.html)
or portal of UTI Infrastructure Technology and Services Limited (UTITSL) (http://www.utitsl.co.in/utitsl/uti/newapp/new-pan-application.jsp).
Supporting documents required to be submitted by QFIs to obtain PAN card are
listed at the following link:
Q.6. What are
the attestation requirements for a QFI for obtaining PAN card?
Ans: For a QFI who is
an individual, Rule 114 of the Income Tax Rules, 1961 read with Form No. 49AA,
requires a copy of the passport to be filed (without any attestation), this
will be taken as both proof of identity and proof of residence. For QFIs other
than individuals, the process requires filing of copy of certificate of
registration duly attested by an "apostille" or at the Indian Embassy
in that country.
In order to meet
the know you client (KYC) requirements as prescribed by Securities Exchange
Board of India (SEBI), the list of documents to be submitted by a QFI for KYC
are available at:
Q.7. What are
the tax related responsibilities of Qualified Depository Participants (QDPs)?
Ans: In order to
facilitate investments by QFIs, the QDPs have been assigned the responsibility
to act as a single point of contact for QFIs for all purposes including tax.
For tax purposes, a QDP will facilitate the QFI to obtain a PAN card. QDPs will
be responsible for any withholding tax in India before making remittance to
QFIs. QDPs will also be treated as a representative assessee/agent of the QFI.
For this purpose QDPs would be required to submit a declaration that they have
no objection to being treated as a representative assessee/agent of QFI. A QDP
may ensure that the broker engaged by it for undertaking QFI transactions
deducts and deposits tax at source failing which the QDP should deduct and
deposit the tax on such transactions.
Q.8. Can QFIs
claim refund from Income Tax Department in India?
Ans: Yes. QFIs can
claim refund from Income Tax Department for which the QFI would have to file
its return of Income in India for that year.
Q.9. Can a QFI
carry forward losses over the years?
Ans: Yes. QFIs are
allowed to carry forward losses over years provided the QFI files its return of
income declaring the loss for the relevant year within the stipulated time
limits.
Q.10. Whether
profits earned by QFI from their investments in Indian securities market would
be treated as Capital Gain or business income?
Ans: As per the
Income-Tax Act, 1961, whether the profits earned from transaction in securities
would be capital gains or business income will depend on facts and
circumstances of each case like the number and frequency of transactions etc.
Please refer to circular No.4/2007 dated 15/6/2007 issued by the Central Board
of Direct Taxes.
Q.11. Whether
QDPs should compute tax deduction at source (withholding tax) on QFI income for
one settlement period on settlement basis or on transaction basis?
Ans: Currently,
settlement on Indian stock exchanges is done at the end of every trading day.
Tax deducted at source under the Income-tax Act, 1961 is to be deposited by the
seventh day succeeding the end of each month. The withholding tax on QFI income
will be computed on settlement basis and not on transaction basis since the
stock broker would credit the net proceeds of all transactions to QFIs on
settlement basis for one settlement period.
Q.12. For
determining the tax deducted at source (withholding tax) liability, can QDPs
set off losses of QFIs against profits earned on monthly basis in a given year?
Ans: As per TDS
provisions, the deductor has to deduct tax either at time of payment of the
amount or at time of credit of such amount (whichever is earlier). Therefore,
any loss of current year available at such time of deducting tax would be
eligible to be set off against the sum payable and the TDS shall be effected on
net basis. However, TDS once effected cannot reduced by the deductor even if
there is loss in subsequent transaction.
Example, in a
given year, a QFI makes three settlements, it earns profit of Rs. 200 on day
one settlement, incurs a loss of Rs. 250 on day two settlement and earns profit
of Rs. 100 on day three settlement. The TDS would be deducted on credit of net
profit of Rs 200 whereas, no TDS
shall be
effected against profit of Rs. 100 as at time of credit of Rs. 100 a loss of
Rs. 250 is available for set off and net basis there is no amount chargeable to
tax.
Q.13. For the
purpose of computing tax deducted at source (withholding tax) Can QDPs set off
in the case of QFIs, the profits earned in one security against losses earned
in another security during a given year?
Ans: Yes. For
computing tax deducted at source (withholding tax) QDPs can set off profits
earned by the QFI in one security against losses earned in another security as
long as these securities are subject to Securities Transaction Tax (STT).
Therefore, this would not be applicable in case of QFI investments in bonds as
bond transaction are not subject to Securities Transaction Tax Such setting off
for computing tax deduction at source would therefore be permissible only in
the case of listed securities and mutual fund Units and redemption by mutual
funds as these are subject to STT. The set off would again be subject to the
general principle that an earlier loss of current year can be set off against subsequent
profit which is credited or paid to the QFI. However, if tax deduction at
source (TDS) has already been effected for a particular credit or payment, it
cannot be reduced by subsequent loss. A QFI is, however, eligible to claim
refund of excess amount of tax deducted at source (withholding) by filing a
return of income for the relevant year.
Q.14. For the
purpose of computing tax deducted at source (TDS), can QFIs Set off of profits
earned by a QFI in the current year against losses incurred in previous years?
Ans: No, A QDP cannot
set off losses of a previous year of a QFI against profits earned in the
current year by the QFI while computing the tax liability for deduction at
source, which would therefore be based only on the profits of the year.
However, QFIs can themselves set off their profits earned in the current year
against losses incurred in previous years. For the purpose, the QFI would need
to file its return of income within the time limits stipulated in the
Income-tax Act, 1961. For this purpose, QFIs need to file return for the
relevant year within the time limits stipulated in the Income-tax Act, 1961.
Q.15. What would
be the applicable rates of taxation if a QFI comes from a jurisdiction with
which India has a Double Taxation Avoidance Agreement (DTAA) as against one
which comes from a non-DTAA Jurisdiction?
Ans: The applicable
rates of taxation in the case of investment from a country will be at the rate
provided in the Income-tax Act or the rate provided in the Double Taxation
Avoidance Agreement, whichever is more beneficial to the investors.
Q.16. Whether
the capital gains arising on sale of shares are computed in Indian currency or
in other currency?
Ans: The capital
gains arising on sale of shares shall be computed by converting the cost of
acquisition, expenditure incurred and full value of consideration in the same
currency, as was initially utilized for purchase of shares and the gains so
computed shall be reconverted in India currency.
Q.17. Whether
DTAA provisions will apply while deducting tax at source?
Ans: Yes. Also see
answer to question No. 15.
Q.18. Will the
QDPs be held responsible for withholding taxes against profits on mutual fund
investments by QFI's?
Ans: Income from
investment from mutual fund may arise by way of distribution of profits by the
fund or by way of redemption by the fund or by way of sale of units of the
fund. In case of distribution of profits by the mutual fund, the mutual fund
itself pays tax on distribution of profits. In case of sale of units of the
fund, the QDP would be required to withhold tax if the buyer of the mutual fund
units has not deducted tax. In case of redemption of units by the fund or sale
of units of the fund, the QDP would be required to withhold the tax.
Q.19. If the QFI
is no longer the client of the QDP, then can the QDP be called upon to make
good the shortfall in tax and liable to interest and penalty having acted in
bonafide and good faith?
Ans: QDP, being a
deductor, shall be liable for any short deduction or non-deduction of tax even
after the QFI ceases to be the client of QDP.
Q.20. What are
the deductible expenses that may be incurred by QFI for purchase & sale of
shares and Mutual Funds?
Ans: The
deductibility of expenses would depend on the fact that whether the income on
the sale of shares is treated as business income or capital gains. In general
if the income is treated as capital gains expenses like brokerage fees would be
allowed.
Q.21. Whether
QDP should treat residence certificate as a sufficient proof of residence and
beneficial ownership of the shares in India by the QFI?
Ans: Prima facie, the
Tax Residency Certificate is evidence of residence in a particular country and
the QDP may rely on such a certificate.
However, as per
Explanatory Memorandum to the Finance Bill, 2012, the amended section 90 and
90A of the Income-tax Act makes submission of Tax Residency Certificate
containing prescribed particular, as a necessary but not sufficient condition
for availing benefits of the tax treaties.
Q.22. Whether
the QDP is required to obtain an Income Tax Order under Section 195(2) of the
Act for determining the income component (capital gains) on the sale of shares?
Ans: Central Board of
Direct Taxes (CBDT) Circular No. 4/2009 dated 29/06/2009, clarifies that the
term 'payer' also means a remitter. As the QDP is making the payment of the
income to the QFI, the QDP could be considered as a 'payer' Under Section
195(2) of the Act, if any person responsible for paying any sum chargeable
under the Act to a non-resident, considers that the whole of such sum would not
be income chargeable in the case of the recipient, he may make an application
to the Assessing Officer(AO) to determine the appropriate proportion to such
sum on which tax is to be deducted (TDS).
The requirement
of obtaining CA Certificate is only in the context of remittance of money
outside India. It is not in the context of TDS liability. The QDP is custodian
of all data in respect of transactions on which income has arisen to a QFI. It
will also maintain the QFI account, wherein the QFIs' income is determined.
Therefore, the QDP is supposed to deduct tax on the basis of sum chargeable to
tax. In normal situations such as working out the capital gains on a
transaction, there would not be any difficulty and QDP can itself determine the
amount chargeable to tax and deduct tax thereon or take help of Chartered
Accountant in this behalf. However, in case there is complexity in determining
such income the QDP should approach the Assessing Officer for determination u/s
195(2). Even for other deductees, it is not mandatory that in each and every
case, they should obtain 195(2) order before deducting TDS. However, in case a
complex issue, it is advisable to do so. This is because the liability to
deduct proper taxes remains on the deductor (i.e. QDP).
Q.23. For the
purpose of computing tax deduction at source (withholding tax), what is the
proof and declaration that the QDP can rely upon for allowing the full time
benefit of a DTAA to a QFI?
Ans: There is no
standard set of documents on the basis of which the DTAA treaty benefit can be
said to have been rightly allowed. It depends on the facts of each case. The
treaty benefit is to be claimed by the person concerned before it can be
allowed. For this purpose, the QDP should obtain the Tax Residency Certificate
from the QFI.
Q.24. Having
relied on the documentations and given the treaty benefits, if later the same
is held not allowable by the tax officer, can the QDP be held responsible and
called upon to pay for any shortfall in tax, interest and penalties?
Ans: The liability to
deduct and pay proper taxes remains that of the QDP as a deductor. Therefore,
for any shortfall in tax QDP can be held responsible. The responsibility
remains both for non-deduction or short deduction of tax if it is found that
the treaty benefit have been incorrectly claimed or considered.
Q.25. What is
the maximum number of years in which an assessment can be done or reopened in
case of TDS returns filed by the QDP?
Ans: As the payment
would be made to QFIs, who are non-residents, the Act does not prescribe any
time limit for scrutiny of transaction for TDS purposes under section 201 of
the Act.
Q.26. Can the
QDP be held responsible for withholding of tax at source in case of a QFI on
sale considerations received under an open offer or buy back of shares where
the purchaser of the shares is responsible for withholding tax and complying
with the TDS filings under the Act?
Ans: Under the
Income-tax Act, any person responsible for paying to a non-resident (not being
a company) or to a foreign company, any sum chargeable under the provisions of
the Act, has to deduct tax at the time of credit of such income to the account
of the payee or at the time of payment, whichever is earlier. The
responsibility of tax deducted at source by the QDP in the case of sale
consideration received by a QFI on account of an open offer or a buyback of
shares would depend upon the facts of the case. In case the purchaser of shares
is crediting the sum to the account of the QFIs or making payment to QFIs, the
purchaser would be required to deduct the tax. However, if the QDP is crediting
the sum to the account of the QFIs or making payment to the QFIs, the QDP would
be required to deduct the tax. Please also refer to question no.
____________________________________________
* Disclaimer:
These FAQs are prepared with a view to help QFI applicants to get generic
understanding of the tax framework. These FAQs cannot be used in a court of law
to interpret any circular, rules, regulations, statutes etc., one way or the
other.
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