NRI's CORNER
F.E.M.A.

Anomaly in Tax Deduction at Source (TDS) under Double Tax Treaty

06.12.2008

 

6th  December 2008.

Shri O.P.Bhatt,
Chairman,
State Bank of India,Mumbai.

Dear Shri Bhatt,

Sub:    Anomaly in Tax Deduction at Source (TDS) under Double Tax Treaty

While congratulating you and the team of State Bank of India for excellent Q2 results amidst very critical times,  I, Rajesh H Dhruva, Chartered Accountant and an NRI Consultant,  am prompted to draw your kind attention about a serious anomaly and erroneous guidance to NRI account holders from Middle-East regarding TDS at concessional rate herein.
 
I also had opportunities of close association with State Bank of India in India and UK by way of addressing innumerable seminars organised by various branches of Gujarat, Mumbai and London; writing articles on the subjects of Non-Resident Indians (NRI) Regulations and India Shining series  in "Namaskar" and maiden issues of "Corporate" -  in-flight magazines of Air India last year being published as adverts of State Bank of India and also last three editions of my booklet "Facilities for Non-Resident Indians", both in English and Gujarati being published by State Bank of India, Mumbai and Ahmedabad for NRI account holders.
 
I am a Chartered Accountant and an Advisor to Overseas Indians in matters pertaining to Foreign Exchange Laws, Tax Laws, Double Tax Treaties & Investments and creator and  chief executive of :
www.nribanks.com only website displaying monthly updated interest rates of almost all banks in India in foreign currencies & Indian Rupee deposits offered to Non Resident Indians ;
femaonline.com a comprehensive website. presenting edited & updated version of Foreign Exchange Management Act, 1999, Rules and Regulations thereunder as also Tax Laws and Banking Regulations pertaining to Non Resident Indians and .
nrimutualfunds.com - -presenting the very best of Equity and income schemes of Indian Mutual Funds and global indices across the world in $ terms .
 
I am forwarding herewith my notes together with copy of relevant provisions of Treaties wherein the required provisions are penned in red and State Bank of India's circular and proforma of self-declaration for your perusal.

I will be happy to provide any clarifications needed in this matter.

With regards.

Sincerely.

RAJESH H DHRUVA
Chief Executive
femaonline .com
Tel. No. : 0091 281 246 3367 ; 205 3367 ; 664 3367
Cell : 0091 98240 49944.
==========================================


TDS at concessional rate on interest on NRO deposits for residents of Oman[Middle-East ] & UAE: 


I. Anomaly re concessional tax rate of TDS for residents of Oman/ Middle-East :
1. One of our client in Oman is been informed by a Branch Manager in Mumbai as regards concessional rate of tax deduction at source [ TDS ] @10.3% on interest earned on NRO deposits.
 
2. He has also been provided part copy of bank circular and a self declaration to be provided by the NRI NRO account holder. [ attachment 1 and 2 to this email ]

3. I believe that the intimation as regards TDS at concessional rate is offered erroneously.

4. As regards this, we would also like to draw your attention as under:
.01. India and Oman have a Double Tax Treaty wherein a resident is defined in Article 4 as an individual “residing in contracting state i.e India and Oman ” being a person who is liable to tax in such states , i.e. India.and Oman.[Annex-1]
.02 Thus, to be covered by the definition of resident under Article 4, an NRI “should
be liable to tax in India and Oman .”
.03 SBI Circular dated 21st August, 2008 in Para 2 (attachment 2 ) refers to
"NRO Customers residing in the Middle East” and furthermore such NRO account
holders are to provide a self-declaration in place of tax residency certificate.
.04 It seems and is presumed that said circular is issued by State Bank of India in view of CBDT’s Circular No.734 , dated 24th Jan.,1996. [Annex - 2]
.05 If it is so or otherwise , it is important to note that said CBDT circular is not applicable to NRIs in Middle-East but “only to Non-Resident Indians in United Arab Emirates (UAE)”.
 
5. We also draw your attention to the fact that earlier India-UAE Double Tax Treaty also defined a resident in similar manner to the definition of India-Oman Double Tax Treaty, wherein Article 4 defined resident as a person who was liable to tax in contracting states i.e. both India and UAE. [Annex - 4]
.02 This definition was subsequently changed in India-UAE Tax Treaty vide Notification No. 282 of 2007 with effect from 28th November, 2007. [Annex - 5]
.03 According to the latest provisions of Article 4 of Double Tax Treaty between India and UAE, an individual who is present in the UAE for a period or periods totaling in the aggregate of at least 183 days in a calendar year is to be considered resident of UAE for the purpose of. [Annex - 3]
.04 Whereas under said Article the Treaty defines an individual “residing in India” as a person who is liable to tax in India.
.05 Therefore, presently for the purpose of applicability of Treaty , an individual in UAE is not required to be a tax resident of UAE by virtue of amended provisions of Article 4 of Double Tax Treaty between India and UAE effected vide Notification No. 282 of 2007 dated 26.11.07.[Annex - 3]
.06 Moreover even the Circular No.734 , dated 24th Jan.,1996,of Central Board of Direct Taxes [ CBDT ] provides that Non-Resident Indians who are covered by the India-UAE Tax Treaty are entitled to reduced rate of tax under Articles 10(2), 11(2) and 12(2) as regards interest or dividends on bonds and deposits with bank and companies @ 12.5 per cent on the gross amount. [Annex - 2]
.07 Whereas NRI individuals residing in Oman not being taxable entities under the Oman tax laws are not and cannot be covered by the definition of 'Tax Resident "coined under Article 4 of India-Oman Tax Treaty and therefor cannot be eligible for said concessional TDS benefit offered by State Bank of India.

6. CONCLUSION : Hence, it may be concluded that the concessional TDS offered to residents of Oman and Middle East is erroneous as the same is contrary to;
.01 Provisions of Article 4 of Double Tax Treaty between India and Oman, which requires residents of both the countries to be tax payers to be eligible for the concessions offered in the Treaty.
.02 CBDT Circular No. 734 dated 24/01/1996 refers to and applies only to the residents of UAE and;
.03 The India-Oman Tax Treaty is not amended in line with Article 4 of India-UAE Double Tax Treaty amended by Notification No. 282 dated 26/11/2007.

II. Anomaly re concessional tax rate of TDS for residents of UAE :

1. We have also gone through the format of self -declaration required by State bank of India in lieu of the tax residency certificate for extending the benefit of DTAA from NRO account holders of Middle-East which includes UAE .

2. Proforma of Self-Declaration
The proforma of self-declaration in Para 3, requires a statement to the effect of "My residential status will be that of --------------------------) (mention the name of the country) Tax Resident.
.02 Herein declaration of tax residency is not necessary for the individuals who are residents of UAE.
.03 For residents of India and UAE stay in UAE matters for the purpose of Treaty and not tax liability in UAE.
.04 Moreover the CBDT Circular is absolutely clear and accordingly the declaration should be as regards stay in UAE totaling to 183 days or more in the relevant calendar year and not tax residency of UAE as is sought in the specified format of Declaration.

3. We, therefore, suggest that the Anomaly of self-declaration seeking declaration regarding "tax residency " by UAE residents should be removed and the declaration may seek "number of days stay in UAE totaling to 183 days or more in relevant calendar year.

4. By any chance I am missing any amendment or regulation whereby NRIs across the Middle-East are subject to concessional rate of TDS I request to inform and will like to stand corrected otherwise if my suggestions are convincing, then appropriate changes may be made by way of:-
.01 Branches of State Bank of India limiting the offer of concessional tax TDS rate to residents of UAE and not entire Middle-East and .
.02 An appropriate change in self-declaration to the effect of number of days stay in UAE totaling to 183 days or more in relevant calendar year.

Copy of relevant extracts of Double Tax Treaty, copy of Notification through which change has taken place in definition of Resident in UAE in India-UAE Treaty wherein the required provisions are penned in red for your perusal., and copy of SBI Circular dated 21st August, 2008 and copy of self-declaration. are enclose.
 

 

 

 


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