Tax Implications of Gifting to Non-residents: A Case Study

Case Study On Taxability of Gift by Resident in India to a Non-resident

Sanjay made gift of $10,000 out of his tax paid income from India on 31st December, 2019 to support his friends Manoj who is non-resident and unemployed in USA for last one year.

Query from Sanjay:

• Whether he would be taxable as donor for $10,000 in India?
• Whether Manoj is taxable for $10,000 as recipient?
• Whether Sanjay is required to withhold any tax while making gift his friend in USA?

Answer:

• Before abolition of Indian Gift Tax Act from 1st October, 1998 all Gifts (Except some) are taxable in the hands of donor @30% with basic exemption of Rs. 30,000. Therefore after abolition Gift Tax Act, there is no liability in the hands of donor.
• As per clause (a) of Section -56(2) (x) of the Income Tax Act (ITA) where any person receives, in any previous year, from any person or persons (other than relatives or on some occasion) on or after the 1st day of April, 2017 any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum is taxable in the hands of the recipient as income from other sources.
• As per Section-5 of ITA: Manoj being non-resident who is taxable in India only for his income accrue or arise or received in India and deemed to arise in India. Sanjay paid this money to the Manoj bank account in USA, so this amount does not consider to be accrue or arise or received in India.
• As per Section 9 of the ITA which provides the list of income which shall be considered to be deemed to arise in India. Clause (viii) of sub section 1 of section 9 of ITA provides that income arising outside India, being any sum of money paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident shall be deemed to arise in India. Therefore, the gift money is taxable under ITA in the hands on Manoj and he is also required to file his tax return in India.
• As per Section 195 of the ITA: Any person responsible for paying to a non-resident any other sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rates in force. Therefore Sanjay is liable to deduct tax at source while remitting gift of $10,000 to Manoj subject to double taxation avoidance agreement (DTAA) benefit.
• As per Article-23 of DTAA between India and USA which distributes taxing right between the two contracting states in respect of various income,  gives source country to tax other income. Therefore, Sanjay is required to deduct tax at source under section 195 read with Article 23 of India USA treaty.
• For the purpose of complying provision of ITA, Sanjay need to have PAN & TAN required to deduct tax based on self-declaration in Form 15CA and chartered Accountants certificate in Form -15CB. He is also required to file his TDS return accordingly.

To Conclude:

• No, he would be taxable as donor for $10,000 in India based on Point 1 as above.
• Yes, Manoj is taxable for $10,000 as recipient in India based on Point 2-4 as above.
• Yes, Sanjay is required to withhold tax while making gift his friend in USA based on Point 5-7 as above.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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