No tax on commission remitted to overseas agents
Q: I plan to return to India and get into the business of buying and selling properties. I may buy some old properties and sell them after renovation. Will I be liable to pay tax on the profits as capital gains attract a 20 per cent levy? — P.K. Memani, Bahrain
A: You will be liable to pay tax on profits under the head ‘capital gains’ only if you are an investor in real estate. However, you intend to trade in properties. You will also be involved in renovating and refurbishing old properties. Such activity partakes of the character of business. therefore, your profits will not be taxable under the head ‘capital gains’ but will instead be taxable under section 28 as profits and gains of a business. You will have to maintain the prescribed books of account and all relevant vouchers and documents in order to arrive at your true business profits. Your accounts will have to be audited by a chartered accountant and the tax audit report needs to be attached to your return of income under section 44-Ab of the Income-tax Act if your total sales or gross receipts in such business exceed rs10 million in a financial year.
Q: An Indian pharmaceutical company has appointed agents in the Gulf who will market products produced by the company. The agents in the Gulf will be paid commission on sales. Would the Indian company have to deduct tax at source when it remits the commission on the ground that such amount falls within the definition of fees for technical services? — F.K. Malhotra, Dubai
A: Under the Income-tax Act, fees for technical services are defined to mean consideration for rendering any managerial, technical or consultancy services. therefore, it has to be considered whether agents in the Gulf would be deemed to render such services. If agents in the Gulf merely promote the pharmaceutical products of the Indian company by meeting doctors, their activities are executory in nature. Such services do not entail rendering of consultancy services to the Indian company. According to courts, consultancy services entail deliberations, conferring with parties and providing advice. Hence, the commission paid by the Indian company to Gulf-based agents cannot be treated as fees for technical services. Further, no managerial services are rendered by the Gulf-based agents. therefore, the question of deducting tax at source would not arise as the commission paid or payable does not fall under section 9(1)(vii) of the Act because no fees are paid for technical services as defined under this provision. However, it is possible that the tax department may take a different view. therefore, it is best to take a ruling of the Authority for Advance rulings which has held in similar circumstances that no tax has to be deducted at source. A favourable ruling would prevent any litigation with the tax department.
Q: A religious trust in India rents its open spaces in order to supplement its income. Would service tax be chargeable on the rent earned by the trust? I have got conflicting opinions on this issue. Please clarify. — P.R. Singh, Doha
A: Service tax is generally applicable when any property is let out, even if it is done on a casual basis. However, for religious trusts which are registered under the Income-tax Act, 1961, exemption is granted under a notification issued in 2012. Such exemption applies to rent earned for letting out precincts of a religious place. A clarification has been issued in 2016 for explaining the meaning of the word ‘precincts’. A recent circular states that the word ‘precincts’ should not be given a narrow or restrictive definition. It would cover all immovable property owned by the religious trust, including areas located within the boundary walls of the complex where religious facilities are provided. even property located in the immediate vicinity which is owned by the religious trust is considered as being located in the precincts. Hence, rent earned by the religious trust for letting out such property is eligible for exemption from service tax.