Section 9 of the Income Tax Act: Tax on Income Deemed to Accrue in India
Accrual and receipt are the two criteria that determine whether income is taxable. Money is subject to taxation in any nation based on these two criteria: either the money must be earned or received in that nation. Income that foreign entities or non-residents earn in India or are presumed to be generating in India is specifically listed in Section 9 of the Income Tax Act 1961 as income that should be assumed to accrue or generate in India. The sections list the types of revenue that are thought to develop or accumulate in India. The evaluation of the taxability of income derived from India has been made possible by the growing interest of foreign corporations and non-resident people in the Indian economy. In this article, we will explain the essentials of Section 9 of the Income Tax Act, which addresses the tax treatment of the income deemed to accrue in India.
Table of Contents:
Understanding Section 9 of the Income Tax Act?
The Income Tax Act's Section 9 specifies who is considered a taxpayer and takes into account the source of income. Income deemed to generate or accrue in India is administered by this section. It prevents tax avoidance and creates openness in income taxation. According to this clause, revenue that has not yet been earned or derived in India must be regarded as having done so. Property income, foreign income, salary, capital gains, company revenue, and profits from lottery and horse racing are just a few of the various forms of income that can arise or accumulate in India. This part has been modified by the government to include revenue categories such as royalties, interest, technical fees, etc.
Section 9 of the Income Tax Act: Explaining the Scope
The many forms of revenue earned in India by foreign entities or non-residents fall under the purview of this section. It comprises earnings from:
Any salary earned in India
Any property located in India
Any source of income or asset located in India
Any profession or business carried out in India
Any interest earned on securities issued by the Indian government by an Indian company
Any dividend distributed by an Indian firm
Additionally, the scope of Section 9 includes:
Fees or royalties charged for technical services rendered in India
Gift of a sum of money to non-residents
Capital gains from the transfer of any asset located in India (directly or indirectly)
Section 9 of the Income Tax Act: Uncovering the Implications
For foreign companies or non-residents conducting business in India, Section 9 has a number of implications. These include:
Income Taxation
Any income received by a foreign entity or non-resident from an Indian business or asset is subject to Indian taxation. The income tax slab rates that apply for the fiscal year are used to calculate the tax rate on such income.
Withholding Tax
Any individual in charge of paying a non-resident must withhold tax at the source in accordance with Section 195 of the Income Tax Act. The tax rate is established by the type of income and, if relevant, the terms of the Double Taxation Avoidance Agreement (DTAA).
Permanent Establishment
Income derived from a non-resident or foreign entity's permanent establishment (PE) in India is subject to Indian taxation. A PE is a fixed location where a non-resident does business in India, like an office or factory.
Section 9 of the Income Tax Act: The Rules Explained
The following guidelines establish the tax ramifications of revenue earned in India by foreign organisations or non-residents under Section 9.
Rule of Territorial Nexus: Taxation applies to all income that occurs or is presumed to occur in India. All forms of income, such as interest, capital gains, commercial profits, etc., are covered by this regulation.
Specific Inclusions Rule: This provision is applicable to certain types of revenue, such as royalties, interest, or fees (for services rendered in India or for technical services acquired from India). According to the norm, the income is taxable since it is considered to have originated in India.
Residence Rule: Any income that originates or accrues outside of India is exempt from Indian taxation under the provisions of this rule. The recipient of such income must not be an Indian resident in order for this criterion to be fulfilled. This suggests that a non-resident's income earned overseas is exempt from Indian taxation.
Provisions of Section 9 of the Income Tax Act
The following are the sub-sections of Section 9 defining the various provisions it lays down for taxpayers:
Section 9(1)(i): Income Derived from a Business Relationship in India
The income resulting from a commercial relationship in India is described in sub-section 9(1)(i). The income received from the transfer of capital assets in India is also taken into account. Intimate relationships between residents and non-residents are covered by this subsection. Profits are generated by this relationship, and the non-resident receives payment. This clause states that a business relationship is formed between a non-resident and an Indian individual if that individual:
Possess the power to enter into agreements in India or are primarily involved in agreements that serve to transfer ownership of property owned by that non-resident person
When such agreements are completed under the non-resident's name or
In order for the non-resident to provide services
Keeps a supply of items in stock and provides them to the non-resident.
Primarily obtains orders for non-residents in India.
According to this provision, any money received by a non-resident from a commercial relationship in India is deemed to have originated or accrued there.
Additionally, if the individual obtaining the order is a broker or general commission agent operating independently in the regular course of business, no commercial relationship will be formed.
Significant Economic Presence (SEP): A non-resident's SEP is seen as a commercial relationship in India, and the revenue it generates is regarded as having originated or accrued there. SEP will be established if:
Payments from transactions involving goods, services, or property (including the transfer of data or software downloads) total more than Rs. 2 crores in a single year, NR is considered to have transacted with an Indian resident.
There are at least three lakh users in India, NR is soliciting business or interacting with users.
Conversely, the following will not be regarded as having a business connection:
Buying products in India with the intention of exporting them
Gathering of information and opinions by newspapers or news organisations for distribution outside of India
Activities limited to filming a cinematograph in India, where the NR is an individual who is not an Indian citizen, a business without any shareholders who are citizens or residents of India, or a business without any partners who are citizens or residents of India
A foreign business that mines diamonds and any revenue generated by the display of uncut and unsorted gems in a certain area.
Sections 9(1)(ii) through 9(1)(vi): Other Incomes Considered to Accrue or Arise in India
Section 9(1) imposes taxes on the following forms of income in addition to business relationships:
Section 9(1)(ii): Compensation for work done in India. It comprises pay earnings from both before and after providing services, as well as benefits like pensions and gratuities that are covered under service or employment contracts.
Section 9(1)(iii): Salary paid by the Indian government to citizens for services performed outside of India.
Section 9(1)(iv): Dividend given by Indian company outside India
Section 9(1)(v): Interest will be considered to have accrued or arisen in India if compensated by
Either the government or the resident, with the exception of situations in which the borrowed funds are utilised for commercial or professional purposes outside of India or to generate income from sources outside of India.
By the non-resident when funds are used in India for commercial or professional purposes.
Any interest paid to a non-resident or any other PE or head office by a non-resident's permanent establishment (in the banking industry) in India will be considered to have accrued or arisen in India.
Section 9(1)(vi)/(vii): Royalties or fees for technical services (FTS) will be considered to have accrued or arisen in India if compensated:
By the government; or
By the resident, with the exception of situations in which it is utilised for commercial or professional purposes outside of India or to generate revenue from sources outside of India.
When funds are used by the non-resident to conduct business, pursue a profession, or generate income in India from any source.
Section 9(1)(viii): Any amount of money paid by an Indian resident shall be considered to have accrued or arisen in India if given to a non-resident on or after July 5, 2019, or to a non-resident on or after April 1, 2023.
Indirect Transfer (according to Section 9(1)(i) Explanation 5)
Any share or interest in a business or entity registered outside of India will be considered to have been situated in India under Explanation 5 to Section 9(1)(i) if the business or entity directly or indirectly significantly derives its value from assets located in India. A business or organisation will be deemed to have a significant amount of its worth derived from Indian assets if, on the designated date:
Without deducting liabilities, the fair market value of the assets held in India exceeds Rs. 10 crores
They account for at least 50% of the total value of all the assets owned.
The term "specified date" refers to the end of the previous fiscal year, which was the transfer date. However, the date of transfer should be regarded as the designated date if the book value of the assets increases by 15% or more. If the transferor does not own more than 5% of the company's or entity's share capital in the 12 months prior to the transfer date, the indirect transfer provision will not apply.
Conclusion
One important clause that establishes the tax implications of the revenue made by non-residents or foreign corporations in India is Section 9 of the Income Tax Act 1961. The section's scope is broad and encompasses a variety of revenue streams. To guarantee legal compliance, non-residents or foreign organisations need to understand Section 9's rules and the tax ramifications.
FAQ
Q1. What is Section 9 of the Income Tax Act?
The tax implications for revenue made by foreign entities or non-residents in India are described in Section 9 of the Income Tax Act, 1961. It states that the Income Tax Act applies to any money earned or received in India, whether directly or indirectly.
Q2. What types of income come under the coverage of Section 9 of the Income Tax Act?
Income from any business or profession conducted in India, income from any property located in India, income from any asset or source of income located in India, income from any salary earnings made in India, income from any dividend given by an Indian company, income from any interest earned on securities by the Indian government or Indian company, royalties or fees paid for technical services rendered in India, and capital gains from the transfer of any asset located in India are all covered under Section 9.
Q3. What is PE (Permanent Establishment)?
PE is the term for a fixed place of business (such as an office or factory) where a non-resident employee works in India. The income earned by a foreign entity or non-resident that maintains a permanent establishment (PE) in India is taxable in India.
Q4. Are permanent establishments and business connections the same?
No, Business relationships and permanent establishment are not the same thing. The term "permanent establishment" designates a fixed place of business where a company has conducted all or part of its operations. A business action that a resident does on behalf of a non-resident is indicated by the business links. The application of the PE principle will determine the taxability of income in cases when India and a nation have a DTAA. On the other hand, taxability will be based on the business relationship in India if there is no DTAA between India and a nation.
Q5. Do foreign entities or non-residents have to pay income tax earned within India?
According to Section 9 of the Income Tax Act, non-residents and foreign entities are required to pay taxes on their income obtained in India.
Q6. What tax rate is applicable to the income earned by foreign entities or non-residents in India?
The income tax slab rates that are in effect for the specific fiscal year are taken into consideration for calculating the tax rate on income produced by foreign entities or non-residents in India.
Q7. How is the income tax calculated for business running in India and overseas?
Only the amount of revenue that is earned or presumed to be earned in India will be subject to taxation for non-residents who run businesses both domestically and overseas.
Q8. What is the Territorial Nexus Rule under Section 9?
According to the Territorial Nexus Rule, any income that originates or is presumed to originate in India is subject to Indian taxation. This holds true for all forms of income, such as interest income, capital gains, and business income.
Q9. What is the Residence Rule under Section 9?
According to Section 9's Residence Rule, money earned or arising outside of India is exempt from Indian taxation if the beneficiary is not an Indian resident.
Q10. What is the Specific Inclusions Rule under Section 9?
Certain forms of income, including interest, royalties, or fees for technical services received from India or for services provided in India, are subject to the Specific Inclusions Rule. This law states that income is taxable in India since it is considered to have originated there.
Q11. Are non-residents or foreign entities mandated to pay tax on income earned in India?
In accordance with Section 9 of the Income Tax Act, non-residents and foreign entities must pay taxes on their income obtained in India.
Q12. What is the tax rate applicable to income earned by non-residents or foreign entities in India?
The income tax slab rates that apply for the fiscal year are used to calculate the tax rate on income received by foreign entities or non-residents in India.
Q13. What is Withholding Tax under Section 9?
A person who is in charge of paying a non-resident must deduct tax at the source in accordance with Section 195 of the Income Tax Act. The tax rate is established by the type of income and, if relevant, the terms of the Double Taxation Avoidance Agreement (DTAA).
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