Section 9 of the Income Tax Act, 1961, is a cornerstone provision in Indian tax law, setting forth specific instances where income is considered to have originated from Indian sources, even if earned by non-residents or foreign entities. This section plays a significant role in determining tax liability for foreign entities and non-residents with economic ties to India. Let’s examine Section 9’s core components and examples for each key provision.
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Section 9 of the Income Tax Act, 1961, is a cornerstone provision in Indian tax law, setting forth specific instances where income is considered to have originated from Indian sources, even if earned by non-residents or foreign entities. This section plays a significant role in determining tax liability for foreign entities and non-residents with economic ties to India. Let’s examine Section 9’s core components and examples for each key provision.
Key Factors Affecting Taxability: Accrual and Receipt
The taxability of income in any country, including India, hinges on two primary factors:
- Accrual – where the income originates.
- Receipt – where the income is received.
For foreign entities, income earned through direct or indirect connections to India, regardless of the location of accrual, is taxable under Section 9. The section categorizes income that is deemed to arise in India, targeting business activities, property income, dividends, capital gains, interest, and more.
Key Rules Under Section 9
- Territorial Nexus Rule
- Any income that arises or is deemed to arise within Indian territory is subject to Indian tax laws.
- This applies broadly to various income types, including capital gains, business profits, and interest.
- Specific Inclusions Rule
- Certain income types, such as royalties, fees for technical services (FTS), and interest, are deemed to accrue in India if provided or received by an Indian entity.
- For instance, if a non-resident receives royalties for services rendered in India, it is taxable under Indian jurisdiction.
- Residence Rule
- Income earned outside India by a non-resident is generally not taxable in India, provided the income has no direct connection to India.
Scope of Section 9
This section applies to different income types and activities by foreign entities or non-residents connected to India. It includes:
- Salary earned for services in India.
- Business activities or professional services conducted in India.
- Property income from assets located in India.
- Dividends distributed by Indian companies.
- Interest income on securities issued by Indian companies.
- Royalties and fees for technical services rendered within India.
- Capital gains from transferring assets situated in India.
Implications of Section 9
- Withholding Tax
- Section 195 of the Income Tax Act mandates that tax be deducted at source on payments made to non-residents, with applicable tax rates determined by the nature of income and DTAA provisions.
- Tax Rates for Foreign Entities
- Tax rates applicable to income earned by foreign entities in India vary, with specific rates based on the type of income, such as capital gains, royalties, or business profits, and provisions in DTAAs.
Full Text of Section 9 of the Income Tax Act, 1961
Below is the quoted text of Section 9 of the Income Tax Act, 1961, which comprehensively outlines the circumstances in which income is deemed to accrue or arise in India:
Section 9. Income deemed to accrue or arise in India.
- The following incomes shall be deemed to accrue or arise in India:
(i) Income from Business Connection: All income accruing or arising, directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India.
(ii) Salaries: Income chargeable under the head “Salaries” if it is earned in India.
(iii) Salary paid by the Government: Salary paid by the Government to a citizen of India for services rendered outside India.
(iv) Dividend: Dividend paid by an Indian company outside India.
(v) Interest: Interest payable by—
– (a) the Government; or
– (b) a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
– (c) a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India.
(vi) Royalty: Royalty payable by—
– (a) the Government; or
– (b) a resident, except where the royalty is payable in respect of any right, property, or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
– (c) a non-resident, where the royalty is payable in respect of any right, property, or information used or services utilized for the purposes of a business or profession carried on by such person in India.
(vii) Fees for Technical Services: Fees for technical services payable by—
– (a) the Government; or
– (b) a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
– (c) a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India.
(viii) Gifts or Money Transfer: Any sum of money paid by a person resident in India to a non-resident or to a non-resident but ordinarily resident in India on or after April 1, 2023, shall be deemed to accrue in India.
(ix) Indirect Transfer Rule: This includes income arising from transfer of shares or interest in a foreign company or entity, if it derives substantial value from assets located in India.
Conclusion
Section 9 of the Income Tax Act, 1961, provides a comprehensive framework for taxing foreign income linked to India. By deeming certain types of income as accrued or arising in India, this section ensures fair tax compliance and transparency, preventing tax evasion by foreign entities with Indian economic interests. Taxpayers must consider both Section 9 and DTAA provisions for accurate assessment of cross-border tax obligations.
FAQs
What is a Permanent Establishment (PE)?
PE is a fixed business location (e.g., office or factory) in India through which a non-resident entity operates. Income from PE is taxable in India.
Are Business Connections and Permanent Establishments the Same?
No. A business connection implies business transactions carried out in India, while PE indicates a fixed place where the non-resident conducts business in India.
Do Foreign Entities Pay Taxes on Indian Income?
Yes, foreign entities pay taxes on income earned in India, including business income, royalties, and interest.
Are DTAAs Applicable?
Yes, if a DTAA exists, its provisions may offer reduced tax rates or exemptions on foreign income, overriding Section 9 where applicable.
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