Do I need to pay tax at once if I let out a property?
Q: I have decided to buy a property in India as the rupee has weakened in the last few weeks and property prices have softened due to better supply in the market. I am told that the property can be rented out to reputed companies for a reasonable rent. Would I have to pay tax and how will the same be computed? Can I remit the rent to the Gulf?
A: If you decide to let out the property, you should do so only to a reputed company on leave and licence basis. No tenancy should be created as you may later find it difficult to get back the property. The net licence fee will be liable to tax in India. In fact, the company which pays you the monthly licence fee will deduct tax at source before paying you the amount. Part of the tax will be refunded to you if your actual taxable income is less. The taxable income will be calculated after claiming deduction of all municipal taxes and 30 per cent standard deduction of the licence fee which you earn. If you have taken a loan to purchase this house, the interest paid in respect of the loan would also be deductible. Hence, your taxable income would be quite low after claiming the initial exemption of ₹250,000 every year. In that case, a refund of the excess tax deducted at source would be granted to you. The net licence fee, after deducting all expenses and the income-tax payable, can be repatriated by you to the Gulf.
Q: In view of large borrowers defaulting and committing frauds on banks, is any action being contemplated against those who assist and abet such defaulting borrowers?
A: The investigative agencies are now bringing to book chartered accountants, lawyers, valuers, etc. In order to get loans, security of immovable properties has to be provided. Lawyers are appointed to make title searches to establish genuineness of ownership of the property. If the lawyer has not done his work diligently, he or she would be prosecuted by the investigative agencies since the loan has been granted by the bank on the basis of the title certificate. Similarly, if chartered accountants give a report of overvaluation of assets, based on which loans are sanctioned by the bank, the accountants can be subjected to investigation. Hence, banks are now bringing to book professionals who colluded with fraudsters. Under the various economic laws, persons who abet in committing a financial crime can also be prosecuted and they could face imprisonment up to seven years when they are convicted by a competent court. Therefore, the investigating agencies also mention professionals who allegedly have colluded with defaulters in the First Information Report so that investigation can be initiated against such professionals.
Q: A foreign company wants to set up a subsidiary company in India. The subsidiary company will carry on such business as it deems fit. However, it will also provide business and marketing support services to the foreign parent company. Would the latter company be liable to pay tax in India on the ground that the subsidiary company constitutes a permanent establishment in India?
A: A permanent establishment will only arise if the foreign parent company has a fixed place of business in India and carries on business operations from such fixed place. The subsidiary Indian company is an independent entity. If it carries on its own activities and provides business and marketing support services to the parent company for which it charges a market driven remuneration to the parent company, the latter would not be deemed to have a permanent establishment in India. Further, there would be no agency permanent establishment if the Indian company merely canvasses for business and does not have any right to enter into a contract on behalf of the foreign company. An agency PE is created only if the Indian enterprise has the right to enter into contracts on behalf of the foreign company. Therefore, so long as the foreign company directly enters into contracts with its Indian customers, the subsidiary company would not be deemed to be an agent of the foreign company. Hence, no tax would be payable by the foreign company in the circumstances mentioned above.