Business profits taxable only if there is an Indian office
Q: Will a builder pay tax on rent of unsold units as business income or will it be treated as property income? A: Rental income earned by a builder from unsold apartments will be taxable as business income
Q: A company incorporated in Mauritius has investments in an Indian company. As part of a group reorganisation, the shares of the Indian company are proposed to be sold to a Malaysian company belonging to the same group. Would there be any capital gains taxable in India as the Indian company’s shares will be sold at the present market value? I also want to know whether transfer pricing regulations of India will be applicable.
— Y.K. Bhansali, Dubai A: Since the shares are to be sold by a Mauritian company, the provisions of the Indo-Mauritian Double Tax Avoidance Agreement would be applicable. Under the provisions of this agreement, capital gains would be taxable in Mauritius if the company is a resident of Mauritius. Therefore, the first document to be seen is the tax residence certificate. The TRC is conclusive proof that the company is a resident of Mauritius. If the shares have been held in the Indian company as a capital investment, the Mauritian company will not be liable to pay capital gains tax in India. In case the shares were held as stock-in-trade, the profits on sale of the shares would be treated as business income. However, business profits are taxable in India only if there is a permanent establishment in India, i.e., a fixed place like an office from where the business is carried on. Hence, if the Mauritian company does not have a permanent establishment in India, even the business profits would not be taxable in India. Where there is no tax liability in India, transfer pricing regulations would not be applicable. Q: My son has got a lucrative job in India. He had taken a loan in April 2014 to buy a house which is under construction. The builder has promised to give possession latest by March 2018. Will he be able to claim the interest paid by him on the loan as a deduction? Initially, he proposes to let out his house as I have a property in which he is currently residing.
— L.R. Venugopal, Doha A: Interest paid on monies borrowed is deductible under section 24 of the Income-tax Act, 1961. As he is proposing to let out the property, the interest would be fully deductible against the rental income which he will earn. Since he does not earn rental income at present, no deduction would be available. However, from the financial year in which the property is constructed, he will get a deduction for the interest paid during the prior years in five equal annual installments. This would be in addition to the full interest which he pays on the outstanding loan for the financial year in which the property is constructed and let out. He will also be entitled to claim deduction for municipal taxes and a standard deduction of 30 per cent of the rental income. Q: Recently when I visited India, I came across many persons using mobile phones for transfer of funds. I am told this will now become common and the use of currency notes will go down. Will this mode of payment also be accepted by shopkeepers in India?
— T. Venkataswamy, Abu Dhabi A: India is moving fast on the road of digitisation. A new platform has been launched for mobile-to-mobile fund transfers. The launch of the Unified Payments Interface (UPI) platform will facilitate transactions between different banks by use of mobile apps. Currently, mobile wallets cannot be interoperated for transactions among different banks. However, with UPI, interoperability among banks will be possible. This will make it possible to have instant online fund transfers. The UPI will also enable merchants and shopkeepers to send debit requests to account holders. This would be like swiping a debit card which is currently done by a shopkeeper. It is, therefore, expected that cash transactions will decrease substantially in the near future and most payments will be made through mobile apps. Banks are currently designing their own apps for the benefit of their customers. The UPI platform has been set up by the National Payments Corporation of India. Q: I am a dormant partner in a firm in India which is engaged in the business of real estate development. Recently, a project has been completed and a few apartments in the building have remained unsold. My firm wishes to let these out at prevailing market rent. I want to know whether the firm will pay tax on the rent as business income or whether it will be treated as property income.
— T.P. Kashyap, Dubai A: The tax department generally takes the view that the rent earned should be assessed as income from house property under section 22 of the Income-tax Act, 1961. However, the true nature of the income needs to be examined. Since your firm is engaged in real estate development, the unsold apartments would be treated as stock-in-trade and not as capital assets. Therefore, the rental income earned would be liable to tax under section 28 of the Act as business income. Such income cannot be taxed as income from house property. Fortunately for you, there is a recent decision of the Supreme Court of India on this point wherein it has been held that rental income earned by a builder from unsold apartments would be taxable as business income. Hence, there should be no further litigation on this issue.