In the course of my work with NRI families from the Middle East (especially UAE), I recently came across a peculiar issue whereby a UAE resident earned considerable income in India through various investments, and wish to claim a relief from taxability of that income in India, under the India UAE DTAA.
However, the very fact that UAE does not as of today subjects individuals to tax, there have been cases where the Income Tax Department (ITD) in India has denied a relief on such income on the ground that the income did not “actually” suffer income tax in both countries, hence the question of invoking DTAA does not arise.
In this post, I have delved deeper in the issue by analyzing specific clauses in India UAE DTAA and court judgments on this issue over the years, so that you get clarity on the taxation of those incomes in India.
Before we proceed: DTAA is a highly interpretative and subjective topic and involves a careful evaluation of facts. Please do not construe this post as tax advice and consult a CA in India with your detailed tax situation & then take an appropriate decision.
Background
A person who is a resident in UAE may maintain bulk of his investments in India which can be in various investment avenues like shares, mutual funds, property, insurance policies etc.
Any income from these investments are taxable in India as per India’s domestic tax law – Income Tax Act, 1961 (ITA) irrespective of a person’s residential status, as the source of the income is located in India.
Also, there is a well defined system of computation of income for tax purposes in India. For example, in case of capital gain, you have to deduct (indexed) cost of acquisition, improvement and expenses of transfer from sale consideration. Likewise, in case of house property income, you can deduct 30% as standard deduction and so on.
Fine till here. Till DTAA comes into the picture!
As per Section 90 of ITA, Indian Government can enter into a DTAA with various countries to avoid possibility of double taxation and permit exchange of information etc. In this context, India has a well defined DTAA with UAE as well, which also got amended in 2007.
Now, the DTAA has various Articles w.r.t. specific incomes and divides the right of taxation of income between the two countries (here, India and UAE). The concerned Article on DTAA may either allow income to be taxed in ONLY one country or in both countries, with India giving credit to tax deducted in UAE or vice versa.
Fine till here also, but the problem begins with the fact that when you talk about UAE tax, UAE does not impose tax! – So, in this case, if an income is subject to tax in India and not UAE, will it work? – Will India happily fore go its share of tax because DTAA says so?
Point to be noted here: Section 90 of the ITA itself contains that DTAA will override tax codes of both countries and it is upon the assessee (taxpayer) to select which one is more beneficial – so, in a case where I, being a resident of UAE, select a particular income in India as not taxable in India, will it be correct?
Judicial precedents on this issue
In all, I could find some 13 judgments relevant to the issue in hand and issued by the Authority of Advance Ruling (AAR) and various benches of the Income Tax Appellate Tribunal (ITAT).
Here, what you can say on a lighter note, the villain of the story, is a 1999 judgment by AAR in case of Cyril Eugene Pereira v. Commissioner of Income-tax[1999] 105 Taxman 273 (AAR – New Delhi) where the AAR concurred with the ITD’s stand that unless the income is actually subject to tax in the UAE, the assessee cannot claim relief under DTAA.
“……….Therefore, these provisions cannot be given effect to until and unless the UAE imposes a tax on income earned by individuals. In other words, these provisions will become effective as soon as tax laws corresponding to the Indian taxes come in force in the UAE.
The argument that relief has to be granted on the basis of potential tax has to be rejected straightway. The question of granting relief from Double Taxation can only arise when the income-tax assessment of a person is taken up…………….”
This judgment gave ammunition to the ITD to reject the claim for relief under DTAA in such cases at the time of assessment and in course of litigation also, the ITD took recourse to this judgment that relief under DTAA be denied to the assessee.
However, the good news is: in all the remaining judgments that I have analysed, this decision has been overruled with detailed explanation and it has been held that just because income is not “actually” taxed in UAE.
For example, in Income-tax Officer (IT) 4(1) v. Mahavirchand Mehta [2011] 11 taxmann.com 194 (Mum.), the Tribunal has this to say:
“………….The Tribunal firstly disagreed with the view expressed by the AAR in the case of Cyril Eugene Pereria (supra) on the ground that the said decision was held to be not laying down the correct law as laid down by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra). The tribunal in this regard observed as follows:
“6. Undoubtedly, in Cyril Eugene Pereria’s case (supra), Hon’ble Authority for Advance Ruling, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re [1995] 213 ITR 3171, concluded that “an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income which is payable in India under the agreement” and that “the provisions of the Double Taxation Avoidance Agreement do not apply to any case where the same income is not liable to be taxed twice by the existing laws on both the Contracting States”. However, in Azadi Bachao Andolan’s case (supra), Their Lordships of Hon’ble Supreme Court, after referring to the said ruling and after elaborate discussions on the various aspects of this issue, concluded that “it is … . not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States”. The reasoning given by Their Lordships included the following:
“According to Klaus Vogel “Double Taxation Conventions establishes an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive ‘tax claims’ or more illustratively to divide ‘tax sources’, ‘taxable objects’, amongst themselves”. Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations describe this method of classification of items and their assignments to the Contracting States. While the English lawyers called it ‘classification and assignment rule’, the German jurists called it ‘the distributive rule’ (Verteilungsnorm). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting State imposes a tax in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: “Thus, it is said that the treaty prevents not only ‘current’ but also merely ‘potential’ double taxation”. Further, according to Vogel, “only in exceptional cases, and only when expressly agreed to by the parties, is exemption in one of the Contracting States dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there.”
It is, therefore, not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States………………….”
(emphasis supplied)
Another thing I wish to mention is that in [2010] 38 SOT 95 (MUM.) Meera Bhatia v. Income-tax Officer, 1(1), Mumbai, the Court held that Cyril case was an AAR judgment which can at best have a persuasive value and cannot act as a binding precedent for courts to decide the matter. So the short point is that the Cyril decision does not have any relevance/standing on the issue now that we have several ITAT judgments conclusively saying that a UAE resident can claim tax relief in India under the DTAA.
Other conclusions I could draw from my reading of the judicial precedents were as follows:
- For checking relief as regards Interest income from a partnership firm in India, Article 11 (interest) need to be checked and NOT Article 7 (Business Profits) – as a result of this, such interest may be claimed as tax exempt in India by a UAE resident, as it is taxable only in the country of residence – [2013] 33 taxmann.com 252 (Mumbai – Trib.) Sunil V. Motiani v. Income-tax Officer (International Taxation)-4(1)
- The rate of tax for interest income @ 12.5% (as given in Article 11 of DTAA) is an all inclusive rate and includes surcharge and education and higher education cess.
- Whether for purpose of taxability of capital gain under article 13(3), distinction among assets acquired prior to coming into effect of DTAA, assets acquired prior to assessee becoming non-resident and assets acquired thereafter was immaterial, for, once DTAA came into effect, it would have effect irrespective of income arising in any previous year beginning on or after 1st April next following calendar year in which agreement came into force. – [1995] 79 TAXMAN 75 (DELHI) AAR, NEW DELHI Mohsinally Alimohammed Rafik v. Commissioner of Income-tax
Before claiming benefit of India UAE DTAA, read this
There are two pre-requisites for claiming benefit of the DTAA as follows:
- Person is a “resident” of at least one country – India or UAE
- Person can provide Tax Residency Certificate (TRC) by the country of which he is a resident
Speaking of first pre-requisite, if a person is a resident of neither country (for e.g. a highly mobile expat), he cannot claim benefit of the DTAA. In this regard, let us check Article 4 as follows:
“ARTICLE 4: RESIDENT
1[1. For the purposes of this Agreement the term ‘resident of a Contracting State’ means:
(a) in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India; and
(b) in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE.
………..” (emphasis supplied)
So, as we can see above, for a UAE resident planning to claim exemption under the DTAA, he needs to be physically present in UAE for at least 183 days for a CALENDER year (not financial year)
A practical problem that can arise in case of certain nature of incomes like interest income which accrues over a period and not a specific date (unlike a capital gain income which accrues on a certain date when say shares are sold) – in that case, if the income arises in multiple years, what will be a relevant calendar year for purpose of Article 4?
Coming to the second requirement on obtaining a TRC (known as “tax domicile certificate”) in the UAE, you can check this useful link on UAE Ministry of Finance website: Link
Analysis of some specific clauses of India UAE DTAA
Now I will try to analyse certain Articles of DTAA where UAE resident can explore to check whether income can be claimed as exempt in India:
“ARTICLE 11: INTEREST
1. Interest arising in a Contracting State (INDIA) and paid to a resident of the other Contracting State (UAE) may be taxed in that other State (UAE).
2. However, such interest may be taxed in the Contracting State (INDIA) in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed:
(a) 5 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution ; and
(b) 12.5 per cent of the gross amount of the interest in all other cases.
…….” (emphasis supplied)
My comments:
This Article can greatly help the UAE residents who have good amount of money in NRO deposits which are taxable in India as per slab rates. In such a case, such people can and do use the DTAA to ask bank to deduct TDS at the DTAA rate of 12.5% and NOT the usual 30.90%.
However, note that in such cases, income WILL be taxed in India – DTAA just prescribes a lower rate and does not take away India’s right to tax the income. Also as I discussed Sunil Motiani’s case, even interest from partnership firm can qualify for a lower 12.5% rate here.
One more point I wish to make is that it is not a good idea to hold a lot of money in NRO deposits –a better option is to shift the money from NRO to NRE and make an NRE FD which is completely tax free in India as well in UAE – if you do so, bank can ask you to submit Form 15CA and a CA certificate in Form 15CB – read more about it here: Form 15CA/CB compliances by NRI: Procedure and Issues
“ARTICLE 13: CAPITAL GAINS
……….
1[3. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State (INDIA) may be taxed in that State (INDIA).
4. Gains from the alienation of shares other than those mentioned in paragraph 3 in a company which is a resident of a Contracting State (INDIA) may be taxed in that State (INDIA).
5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 above shall be taxable only in the Contracting State of which the alienator is a resident (UAE).]
1. Paragraphs 3, 4 and 5 substituted for paragraph 3 by Notification No. SO 2001(E), dated 28112007.”
(emphasis supplied)
My comments:
This is a very important clause. If UAE resident holds “shares” of Indian companies), very likely it will fall in clause 4 which gives India the right to tax. So, there is no relief w.r.t. shares.
Now, as regards moveable property other than shares, clause 5 will apply, which gives right to UAE to tax that income which means income is tax exempt in India.
Speaking of moveable property other than shares, I can think of mutual funds, surrender value of insurance policies which are not covered by Section 10 (10D) exemption, bonds, debentures etc. In my view, DTAA relief can be explored for such incomes in view of this Article.
However, the broader point I wish to bring here from an investment planning point of view is that if a UAE resident has a good chunk of portfolio in these investments, the planning is not done right. In my view, UAE based NRI must consolidate his investment portfolio in India in such a way that entire investment is concentrated within equity shares, mutual funds and NRE FD.
When you have NRE FD which gives you 7% tax free in India with no tax incidence in UAE, why should you even bother to look at debt mutual funds and bonds etc (however, also read this: However, also read this post on NRE FD: NRIs: Do not go overboard on NRE FDs) – most likely, those investments are missold to NRIs by unscrupulous advisers and I would advise such NRIs to consult a fee-only investment adviser to rectify and streamline these issues.
“ARTICLE 19: NON-GOVERNMENT PENSIONS AND ANNUITIES
1. Any pension, other than a pension referred to in Article 18, or any annuity derived by a resident of a Contracting State (UAE) from sources within the other Contracting State (INDIA) may be taxed only in the first mentioned Contracting State (UAE).
2. The term “pension” means a periodic payment made in consideration of past services or by way of compensation for injuries received in the course of performance of services.
3. The term “annuity” means a stated sum payable periodically at stated times during life of during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.
My comments:
If a UAE resident receives a pension from India (other than a Government pension which is covered in Article 18) or any annuity from India at a time when he is a resident of UAE, India does not have the right to tax that money.
If we see the tax structure of pensions and annuities, it is chargeable in ITA under the head “Income from Salaries” at applicable slab rates. If it is family pension, it is taxable as “Income from Other sources” with a 1/3 deduction. Take another case of annuity from NPS or pension plans issued by LIC/private insurance companies in India, it is taxable at normal rates in India. Also, if the payment is to a non-resident under ITA, then the provider will deduct TDS @ 30.90% under Section 195.
In such situations, there is a possibility that the UAE resident can claim zero TDS and zero tax on that money in India by taking advantage of this Article.
“ARTICLE 21: PROFESSORS, TEACHERS AND RESEARCHERS
1. An individual who is a resident of a Contracting State (UAE) immediately before making a visit to the other Contracting State (INDIA), and who, at the invitation of any university, college, school or other similar educational institution, which is recognised by the Government, a political subdivision or a local or statutory authority of that State (INDIA), visits that other Contracting State (INDIA) for a period not exceeding two years solely for the purpose of teaching or research or both at such educational institution, shall be exempt from tax in that other Contracting State (INDIA) on his remuneration for such teaching or research.
2. This Article shall not apply to income from research if such research is undertaken primarily for the private benefit of a specific person or persons.”
(emphasis supplied)
My comments:
There are basically four main conditions for claiming exemption from India taxation for a UAE resident professor/teacher as follows:
- The visit is at the invitation of a university in India
- The university is recognized under laws of India
- Period of visit does not exceed 2 years
- Research is not for private benefit
A practical situation may arise where the period of visit was originally within 2 years, and then it was extended – in such situation, the UAE resident may have to go back and revise his tax returns for the previous year. A good tax planning opportunity that universities can exploit is to send the researcher back within 2 years and then send a fresh invitation after a gap of few months. However, on a lighter note, you and me we can talk scenarios however the critical thing is how you will convince the Assessing Officer at assessment stage and Court/Tribunal if case goes in litigation.
Other points on UAE resident claiming relief under India UAE DTAA:
- In case you are a UAE resident and have a doubt on taxation of income in India under ITA and DTAA and if yes, at what rate it is taxable, you can apply for an Advance Ruling – this facility is available whether you’ve already made the transaction or even planning to do so.
- Please bear in mind that despite favourable judgments, there is a considerable scope of tax litigation in such cases. It is always advised that even where you claim zero tax on certain incomes which are taxable in India, you should go ahead and file a tax return in India and disclose the income as “exempt” income (Also read: Why Returning NRIs should continue filing tax returns even if no taxable income) This will at least ensure that in the worst case scenario where income is held taxable, the Assessing Officer does not have a case to impose penalty for concealment of income given the fact that you’ve made all the right decisions – some favourable decisions in this regard are ITAT Raman Chopra (which I’ve discussed in detail here) and Commissioner of Income-tax, Delhi-XV v. Smt. Neenu Dutta [2013] 35 taxmann.com 454 (Delhi)
Final comments:
So, the short answer to the question posed in subject line is, YES. Having said that, there are a lot of ifs and buts and the scope for tax litigation will always persist in such cases. Also, claiming relief has to be also weighed against compliances like obtaining TRC in UAE, CA’s consultation fee in India, etc. In my view, apart from taking advantage of the treaty provisions wherever applicable, a UAE resident should try to structure his investments in India in such a way that the need for seeking a relief under the DTAA does not arise in the first place.
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