Don’t discriminate against non-residents on the tax front

The Income Tax Act, 1961 envisages tax on long term capital gains (LTCG) at a flat 20 per cent (other than those on certain specified securities).

This is enshrined in Section 112(1)(a) for a resident and under the analogous Section 112(1)(c) and Section 115E for non-residents, the latter section specific to non-resident Indians.

For a resident individual having income from other streams besides LTCG the basic exemption of ₹2,50,000/₹3,00,000/ ₹5,00,000 (based on age of the individual) is made available to be offset against these income streams and then the balance of basic exemption is allowed to be offset against the computed LTCG per proviso to Section 112(1)(a).

A non-resident individual is allowed to offset the basic exemption limit against incomes other than LTCG incomes only, and if there is an overflow/shortfall available left of the basic exemption limit then the same is not available to be offset against LTCG. This is due to the absence of a similar proviso as in Section 112(1) under Section 112(1)(c) and in Section 115E — probably an erroneous drafting of law.

India follows the UN model code of DTAA (double taxation avoidance agreement), under which, Article 24 talks of non-discrimination.

Simply put, the non-discrimination clause of the DTAA warrants that a non-resident ought not to be discriminated as against a resident on the basis of charge, method of assessment and on the rates of tax.

As for non-resident corporate entities being taxed at a differential rate of tax vis-a-vis resident corporates, Explanation 1 to Section 90 explicitly says that the differential rate of tax for foreign companies shall not be discriminatory (the insertion of this was done after the decision in the well-known Societe Generale case).

This explanation addresses only non-resident corporate entities and not non-resident individuals.

Right to equality

Article 14 of the Constitution envisages “right to equality” under all laws of the country.

The non-availability of the basic exemption limit overflow into LTCG for non-resident individuals hence appears to be discriminatory under the DTAA provisions besides being squarely hit by Article 14 of the Constitution, thereby raising issue of unconstitutionality in the matter and manner of calculating taxes for a non-resident vis-a-vis a resident.

The moot point here is not a question of rate of tax but granting of the basic exemption or its overflow limit into LTCG.

A non-resident Indian may opt for the normal scheme of computation as against Section 115E vide Section 115I. He, thereby, gets the option to go through the new regime of taxation as per Section 115BAC or under Section 112(1)(c).

Unfortunately both Sections 115BAC and 112 are contained in the same chapter and Section 115BAC opens with a non-obstante clause with the wording “but subject to the provisions of this chapter”.

Thus, even under the new regime, the basic exemption limit is not available for a non-resident individual to be offset against the LTCG income if there is an overflow of the basic exemption after adjusting against other streams of income or only against LTCG if that was the only stream of income.

The legislature is privy to pick and choose what to tax or otherwise; thereby tax differentiation is permitted, but discrimination is not.

The only alternative available to correct this drafting lacuna on basic limit availability/its overflow into LTCG for non-resident individuals is through an ordinance or with a retrospective amendment in the upcoming Budget to obviate floodgates of litigation.

The writer is a chartered accountant

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