Budget 2023 for NRI: Share issuance and TDS norms tightened

In a move to sync the Indian foreign exchange regulations with Income Tax Act, the government proposed to bring issuance of shares to non-residents above the fair market value within tax purview. This will prevent generation and circulation of unaccounted money from non-resident investors in a closely held company in excess of its fair market value.

Suresh Surana, Founder, RSM India, said, “The purpose of that provision seems to be to ensure that the shares issued to the non-resident shareholders are not at a substantial premium that is not justifiable. Any such excess premium would be brought under the tax net and would become taxable as ‘income from other sources’ in the hands of the Indian company.”

The adjusted book value method or the discounted free cash flow method would have to be complied with starting April 1, 2024 and would apply to all years starting assessment 2024-25. But Surana warns, this may result in more litigation and hinder genuine business transactions.

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TDS

Unit holders of wealth and pension funds have been facing the brunt of a small technical issue, whereby a business trust was deducting and depositing tax at source (TDS) on the interest income of non-resident Indians at 5 percent.

The income tax department has received representations that in some cases, a lower rate of deduction may be required, for instance, for notified Sovereign Wealth Funds and Pension Funds. But this exemption was not available at the time of tax deduction as a certificate for lower deduction under section 194LBA couldn’t be obtained under section 197 of the Act.

The Union Budget has proposed to extend the scope for lower or nil tax deduction at source if the Assessing Officer is satisfied that the total income of the recipient justifies the lower rate.

Starting April 1, 2023, sums on which tax is required to be deducted under section 194LBA would be eligible for deduction at a lower rate.

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TDS/ Tax Filing

In a bid to bring more individuals under the tax-filing net, the government had been levying double the rate of tax collection and deduction at source (TCS and TDS) for non-filers of income tax.

But this move affected the non-resident Indians, who did not have TDS and TCS of more than Rs 50,000 during a year. The Union Budget 2023 provides a relief from these special provisions to non-resident Indians, who don’t have a permanent establishment in India, starting April 1, 2023.

Gifts

Often Indian residents would offer gifts to non-residents, who would claim these to be non-taxable. As a result, any amount exceeding Rs 50,000, received by an NRI without consideration on or after July 5, 2019, was deemed to accrue or arise in India.

But to avoid misuse by not-ordinarily resident Indians, starting April 1, 2024 all gifts above Rs 50,000 to not-ordinarily resident – without consideration from an Indian resident – would be deemed to arise in India and would be chargeable to tax.