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Representation to Finance Ministry & Financial Institutions  » TDS anomalies regarding Long Term capital gains of NRIs. - 06.03.2006

TDS anomalies regarding Long Term capital gains of NRIs.

 

6th March, 2006.
Shri P. Chidambaram,
Honorable Finance Minister,
Ministry of Finance,
New Delhi.

Respected Shri P.Chidambaram,


Sub:    TDS anomalies regarding Long Term capital gains of NRIs.

Good wishes and I take this opportunity to heartily congratulate you for presentation of a progressive and balanced budget, which will definitely enhance the pace of economic development and provide an opportunity to the rural population living in the farthest corner of India  to take a better share of prosperity and opportunities widening for Indians.

Sir, vide my letter  dated 3rd January, 2005, I had forwarded submissions regarding TDS anomalies pertaining to Short Term capital gains of Equities and Equity Schemes  and Long Term gains of Debt and Hybrid Schemes in case of Non Resident Indians.
I sincerely thank you for implementing appropriate changes and providing for TDS @ 10% on income by way of Short Term capital gains of Equities and Equity Schemes by insertion of  Sub-clause ( C ) being  Clause 1 (b) (i) (C) of Part-II of THE FIRST SCHEDULE bringing  the TDS rate at par with the 10% rate of Income Tax , which will definitely bring a sigh of relief to NRIs across the world.

While the said amendment is being made , a simultaneous change suggested and necessary regarding Long Term capital gains  arising  from Debt and Hybrid Funds of Indian Mutual Funds  being taxed at 10%  but TDS being levied at 20% continues to be a part of the Statute as the same is covered by Clause 1 (b) (i) (D)  of  Part-II of THE FIRST SCHEDULE, which continues to represent the erstwhile Clause 1 (b) (i) (C) of the Finance Act, 2005.

I once again request you to look into this aspect and provide for TDS @ 10% in case of Long Term capital gains arising out of Debt and Hybrid Schemes of Indian Mutual Funds in case of Non Residents as the rate of income-tax for such gains  is prescribed at 10% vide First Proviso to Section 112 of the I.T.Act,1961.

I am enclosing copy of relevant part of Section 112 of the Income Tax Act, 1961, which provides for tax at 10% and also relevant part of THE FIRST SCHEDULE of Finance Bill 2006, which provides for TDS at 20%.

In case any clarifications are necessary, I shall be more than happy to provide appropriate assistance to the best of my ability.

 

Thanking you in anticipation. 

Sincerely,

 

RAJESH H DHRUVA
Chief Executive
nribanks.com
Tel. No. : 0091 281 2464099 / 2463367
Cell : 0091 98240 49944

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THE FIRST SCHEDULE
(See section 2)  

 

 

PART II

RATES FOR DEDUCTION OF TAX AT SOURCE IN CERTAIN CASES  

 

In every case in which under the provision of sections 193,194, 194A, 194B, 194BB, 194D, and 195 of the Income – Tax Act, tax is to be deducted at the rates in force, deduction shall be made from the income subject to the deduction at the following rates :-

 

 

 

1. In the case of a person other than a company –

 

 

 

(b) where the person is not resident in India

(i) in the case of a non-resident Indian-

(A) on any investment income                                                                                  20 per cent;

 

(B) on income by way of long-term capital gains referred to in section 115E                 10 per cent;

 

(C) on income by way of short-term capital gains referred to in section 111A      10 per cent;

(D) on other income by way of long-term capital gains [not being log-term

capital gains referred to in clauses (33), (36) and (38) of section 10]                     20 per cent;

(E)  …. …………..


PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961


112.
(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggre­gate of —……

 

         [(c)            in the case of a non-resident (not being a compa­ny) or a foreign company,—

 

(i)      the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

 

   (ii)      the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;]

 

[Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second provi­so to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

 

 


COPY OF LETTER /MAIL Dt. 3.01.2005

----- Original Message -----
From: keynote@nribanks.com
To: fm@finance.nic.in
Sent: Monday, January 03, 2005 6:11 PM

Subject: TDS Anomalies re: long-term and short-term capital gains of NRIs


Shri P. Chidambaram,,
Honourable Finance Minister,
Ministry of Finance,
New Delhi

Respected Shri P.Chidambaram,


Sub : TDS Anomalies re: long-term and short-term capital gains of NRIs


Good Wishes and wishing you a very happy year 2005.

While presenting the tax proposals in the Union Budget 2004-05 as Hon. Finance Minister while recognizing the capital gain  tax as a vexed issue , Sir , You have revamped the capital gain tax by granting total tax exemption to long-term capital gains from security transactions i.e. equity shares and equity schemes of Mutual Funds held for a period exceeding 12 months and short-term capital gains thereof at 10% stating that “ the new tax regime will be a win-win situation for all concerned."

Unfortunately, Your encouraging initiatives are grossly defeated  by anomalies in the provisions of Tax Deduction at Source ( TDS ) pertaining to these long-term and short-term capital gains being :

.01 Anomaly of 30% TDS from short term gains of equity shares & equity oriented units  being taxed at 10%.
.02 Anomaly of 20% TDS from long term Debt & Hybrid funds being taxed at 10%.

2. The anomalies are detailed herein  with remedial suggestions and unless corrective action is taken immediately, the NRIs will definitely be shaken off from investment in equities and equity , debt and hybrid schemes of Indian Mutual Funds.

3. Should you require any clarifications ? I will be more happy to provide assistance to the best of my ability.

I once again request you to kindly look into the matter and if thought proper, request for appropriate corrections.

 

Thanking you in anticipation. 

Sincerely,

 

RAJESH H DHRUVA
Chief Executive
nribanks.com
Tel. No. : 0091 281 2464099 / 2463367
Cell : 0091 98240 49944

 

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I. ANOMALY OF 30% TDS FROM SHORT TERM GAINS OF EQUITY SHARES & EQUITY ORIENTED UNITS BEING TAXED AT 10 %
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1.The Finance Act, 2004 has exempted Long Term Capital Gains [LTCGs] from Equity Shares and Units of Equity-Oriented Funds and
.02 levied tax rate of 10% in case of Short Term Capital Gains [STCGs], arising out of Equity Shares and Units of Equity-Oriented Funds i.e. gains from units held for a period 12 months or less.
1.2 Accordingly, Equity and Units of Equity-oriented Funds are taxed as under –
.01 -  0%  tax, in case of Long Term Capital Gains [LTCGs]
.02 - 10% tax in case of Short Term Capital Gains [STCGs]. 
2. The Provisions relating to Tax Deducted at Source [TDS] in case of a person "Not Resident in India" lays down  -
.01 -   0% TDS from LTCGs  &

.02 -  30% TDS in case of STCGs - not specifically provided – hence covered by residual  clause –

"whole of the other income"

[ paragraph 1(b) (i) (G) of PART II  OF FINANCE ACT,  2004 – Annexure-I ]

 

3. THEREFORE, in case of "Non-Resident", although tax payable on STCGs arising out of Equity Shares and Units of Equity-oriented Funds is 10%.

.02 Tax is to be deducted at 30%. 

4. This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only. 

5. This will also create serious hardships for Non-Residents, as this will require filing of Tax Return to claim the refund of excess tax deduction of 20%, i.e. 30% TDS - 10% tax payable. 

6.  REMEDIAL SUGGESTION:

A Clause should be inserted in Part-II of THE FIRST SCHEDULE of ensuing Finance Act, prescribing the rate of TDS at 10% in case of STCGs on assets referred to in Section 10(38) in case of "a person not Resident in India".

 

II.  ANOMALY OF 20% TDS FROM LONG TERM DEBT & HYBRID FUNDS BEING TAXED AT 10%

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Similarly, LTCGs arising from Units of Unit Trust of India or Units of Mutual Funds, other than Units of Equity-oriented Funds are taxed at the rate of 10% by virtue of Section 112 of Income-tax Act, 1961.

[ Proviso to Section 112 of the Income Tax Act, 1961 – Annexure-II ] 

 

2. However, provisions of Tax Deduction at Source (TDS) require  deduction of tax at     the rate of 20% as provided in paragraph-1 (b) (i) (C) of Part II of the Finance Act, 2004.
[ paragraph 1(b) (i) (C) of PART II  OF FINANCE ACT,  2004 – Annexure-III ] 

 

3. Such deduction is prescribed year after year by relevant Finance Act and continues to be at 20%  since many years. 

 

4. ANOMALY : THEREFORE, whereas LTCGs of Debt Schemes and Hybrid Schemes of units, i.e. Schemes other than Equity-oriented Funds are to be taxed at 10%,

.02 The tax deduction is prescribed at 20%.

 

5.  This seems to be a drafting anomaly as the intention of the Statute is to levy tax at 10% only.

 

6. REMEDIAL SUGGESTION

A Clause should be inserted in paragraph 1 (b) (i) of Part-II of THE FIRST SCHEDULE of ensuing Finance Act prescribing the rate of TDS at 10% in case of LTCGs arising out of listed Securities, Units of Unit Trust of India and Units of Mutual Funds.  

ANNEXURE-Iparagraph 1(b) (i) (G) of PART II  OF FINANCE ACT,  2004

Part II

Rates for deduction of tax at source in certain cases

 1. In the case of a person other than a company—

(b) where the person is not resident in India

(i) in the case of a non-resident Indian—

G) on the whole of the other income

30 per cent


ANNEXURE-II : PROVISO TO SECTION 112 OF THE INCOME-TAX ACT, 1961

112.
(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggre­gate of —……

            [(c)            in the case of a non-resident (not being a compa­ny) or a foreign company,—

(i)      the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

   (ii)      the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent ;]

[Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities [or unit], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second provi­so to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

[Explanation.—For the purposes of this sub-section,—                       

(a)   “listed securities” means the securities—

(i)        as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and

(ii) listed in any recognised stock exchange in India;

   (b)     “unit” shall have the meaning assigned to it in clause (b) of Explanation to section 115AB.]

 

ANNEXURE-III : PARAGRAPH1(b) (i) (C) OF PART II  OF FINANCE ACT,  2004

Part II

Rates for deduction of tax at source in certain cases

 

1. In the case of a person other than a company—

(b) where the person is not resident in India

(i) in the case of a non-resident Indian—

(C) on other income by way of long-term capital gains [not being long-term capital gains referred to in clauses (33), (36) and (38) of section 10]

20 per cent