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Business Daily from THE HINDU group of publications

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Investment World - Income Tax

Columns - Tax Talk 

Double taxation of salary

T. Banusekar 

 I am currently working in the US. I receive my salary in terms of dollars and rupewhich is taxed in the US and India respectively.

 As I am taxed for the salary that I receive in India, one part of my salary is taxed b India and US as well. Are there any benefits available under double taxation avoidagreement between India and the US? —  Perumal  

In your query you have not indicated what your residential status is under the IncoTax Act. You have also not indicated whether you would be a resident of India or in accordance with the Double Taxation Avoidance Agreement between India andUS. Under Section 6 of the Income Tax Act, an individual is resident in India if hesatisfies any one of the following conditions:

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He is in India for 182 days or more in the previous year. He is in India for 60 daysdays if he leaves India to take up employment outside India if he is a citizen of Ind being outside India comes to India on visit if he is a citizen of India or a person oforigin) or more in the previous year and for 365 days or more in the four years prethe previous year.

He is resident but not ordinarily resident if he satisfies any of the following condit

(i) He is non resident in 9 out of the 10 years preceding the previous year. (ii) He iIndia for 729 days or less in the 7 years preceding the previous year. (iii) If an indis resident but is not resident but not ordinarily resident then he would be resident ordinarily resident. An individual who is not a resident would be a non-resident. Tscope of taxation in India on the basis of the Income Tax Act in accordance with S5 of the Act will be on the following basis (see table).

For the purpose of taxation on the basis of receipt, it is the place of first receipt aftaccrual of income, which is to be taken.

It can thus been seen that if you are a resident and ordinarily resident in India inaccordance with the Income Tax Act, your salary earned in the US will also be taxIndia. You have, however, stated that only your Indian salary is taxed in India. Th be taken as indicating that you are either a resident but not ordinarily resident in Ina non-resident in accordance with the Income Tax Act. The Double Taxation AvoAgreement between India and the US in Article 4 defines when an individual wouresident in India. The tests for determining the same would be as follows:

He shall be deemed to be a resident of the State in which he has a permanent homavailable to him; if he has a permanent home available to him in both States, he shdeemed to be a resident of the State in which his personal and economic relations closer (centre of vital interests).

(i) If the State in which he has his centre of vital interests cannot be determined, odoes not have a permanent home available to him in either State, he shall be deem be a resident of the State in which he has an habitual abode.

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(ii) If he has an habitual abode in both States or in neither of them, he shall be dee be a resident of the State of which he is a national.

(iii) If he is a national of both States or of neither of them, the competent authoritithe Contracting States shall settle the question by mutual agreement.

Each of these tests are alternative tests and a subsequent test would apply only if tearlier test fails. Thus under the Double Taxation Avoidance Agreement you cannresident of both India and USA and would end up with being a resident only of onthese countries.

Article 25 of the Double Taxation Avoidance Agreement between India and USA provides for tax credit being allowed by the country of residence in accordance wiDouble Taxation Avoidance Agreement in respect of the tax paid in the country osource. The tax credit that can be taken will be the tax paid on the doubly taxed in but cannot exceed the tax payable on such income in the country of residence.

You may note that if the country of residence is India, credit will be allowed only respect of the federal taxes of the US imposed by the internal revenue code (but

excluding the accumulated earnings tax, the personal holding company tax and sosecurity taxes). If you are a resident of the US, credit can be claimed only against taxes payable in the US which are stated above. You may also note that a person wnot a resident of either of the countries under the Double Taxation Avoidance Agrcannot get the benefit of a Double Taxation Avoidance Agreement.

 I received 500 shares of my company under Employees Stock Option Plan (ESOP)which is listed in both the BSE and NSE. I acquired these shares at Rs 98 per sharMay 2007.

 I also paid a fringe benefit tax of Rs 120 at the time of acquiring these shares. I no propose to sell these shares and I would like to know what will be the capital gainrate) on the sale of these shares. —  A.S. Chandrasekar  

The Finance Act 2007 has amended the provisions of Section 115WB to provide tEmployees Stock Options will also be a fringe benefit and fringe benefit tax will b payable on the same.

Section 115WKA has also been introduced in the Act to provide that such tax mayrecovered by the employer from the employee.

The value of fringe benefit is to be taken as the difference between the fair marketof the share on the date on which the option vests with the employee as reduced byamount actually paid or recovered from the employee in respect of such shares.

The fair market value is to be determined in accordance with the method prescribethe board in this regard. Section 49 of the Act has also been amended to provide th

cost of acquisition of such shares will be the fair market value which is taken for th purpose of determining the fringe benefit. Since fringe benefit tax has been paid bin respect of the options, the fair market value taken for the purpose of determininfringe benefit will be your cost of acquisition and this could be reduced from the fvalue of consideration in computing the capital gains.

You could also reduce expenses such as brokerage which are incurred wholly andexclusively for the purpose of the transfer in computing your capital gains. Since tshares have been held by you for less than 12 months the gain would be short-term

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