Taxation Of An Investment By An Indian Individual In Shares Of A Foreign Company

Author:Mr Smeeksha Bhola
Profession:Singh & Associates
 
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INTRODUCTION

Sometimes Tax treatment of income arising by an Individual may not be clear from direct provisions of the Income tax act, 1961, an interpretation of various clauses of the Income Tax Act, 1961 along with provisions of Double Taxation Avoidance Agreement may clarify the taxation of income arising from such complex transactions. One such situation, where provisions of Income Tax Act, 1961 are to be read in consonance with the provisions of Double taxation avoidance agreement is in the case of an investment by an Indian Individual (ordinarily resident in India) in the shares of a Foreign Company.

An Investment by an Indian Individual in shares of a Foreign Company may result in following types of Incomes:

on dividend received from such investment made in Spain? Income, as Capital Gains, by way of transfer of such shareholding in Foreign Company RELEVANT LEGAL PROVISIONS AND OBSERVATIONS

As per the provisions of Income Tax, taxability of an Individual depends upon his/her days of residence in India. As per Section 6 of the Indian Income Tax Act, 1961, which defines residence in India for the Taxation purposes, the Indian Individual in present case is ordinarily resident in India. Section 4 of the Income Tax Act, 1961 provides for Charge of Income Tax on the "Total Income". Further, Section 5 of the Income Tax Act, 1961 provides for "Scope of Total Income" in case of an individual ordinarily resident in India. As per the said section, all income received or is deemed to receive in India, accrues or arises or is deemed to accrue or arise in India or accrues or arising outside India, during a previous year from all sources in included and hence liable to taxation. However, Section 10 of the Income Tax Act, 1961 provides for Incomes which do not form part of Total Income. Section 10 (34) of Income Tax Act, 1961 provide exemption to income received by way of dividend only from a domestic company in the hands of the recipient, however all income received by way of dividend from a foreign company is liable to be taxed in India. Therefore, Dividend received from foreign Company is taxed under the head "Income from other sources" under the Indian Income Tax Act of 1961. Relevant provisions of the said DTAA need to be examined to determine taxation of Dividend Income received by an Indian Individual from a Foreign Company. Usually many DTAA's contain a provision of Withholding tax (i.e. tax deducted at source) on dividend incomes. The rate of tax on such...

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