Income tax
This query is : Resolved
23 April 2009
I have the follwoing query -
A company has bought back it;s FCCB ( Foreign Currency Convertible Bonds ) at a discount from non resident sellers as per RBI permission. The seller may have some capital gain on such bonds, however the buying back company is not having any infomration about the seller or his purchase price or period of holding. In such a scenerio there would be any withholding tax liability on the paymemt made to non resident sellers. if yes under what section and what rate?
A company has bought back it;s FCCB ( Foreign Currency Convertible Bonds ) at a discount from non resident sellers as per RBI permission. The seller may have some capital gain on such bonds, however the buying back company is not having any infomration about the seller or his purchase price or period of holding. In such a scenerio there would be any withholding tax liability on the paymemt made to non resident sellers. if yes under what section and what rate?
25 April 2009
No witholding tax.
09 May 2009
Any answers please,
31 July 2024
In the scenario where a company buys back its Foreign Currency Convertible Bonds (FCCBs) at a discount from non-resident sellers, the company must consider the withholding tax implications on the payment made to the non-resident sellers. Here's how this situation is generally handled:
### Withholding Tax Liability
1. **Capital Gains on FCCBs**:
- The gains arising from the transfer of FCCBs by non-residents are considered capital gains under Indian tax laws. The specific treatment and rates depend on whether the gains are short-term or long-term, which in turn depends on the period of holding of the bonds.
2. **Withholding Tax Requirements**:
- According to **Section 195** of the Income Tax Act, any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of the Act (except for income chargeable under the head "Salaries") shall, at the time of credit or payment, whichever is earlier, deduct income tax thereon at the rates in force.
- Since the company does not have information about the seller’s purchase price or period of holding, it might be challenging to determine the exact amount of capital gains and thus the appropriate withholding tax rate.
### Determination of Withholding Tax Rate
1. **Default Rate**:
- In the absence of specific information about the capital gains, the company may consider the default withholding tax rate under Section 195. This default rate for long-term capital gains is typically **20%** plus applicable surcharge and cess. However, the exact rate may vary based on the nature of the gain (short-term vs. long-term).
2. **Double Taxation Avoidance Agreement (DTAA)**:
- If there is a DTAA between India and the country of residence of the bondholder, the provisions of the DTAA might provide a lower rate of withholding tax. The company would need to obtain a tax residency certificate (TRC) from the non-resident seller to avail of the benefits of the DTAA.
### Practical Considerations
1. **Request Information from Sellers**:
- The company should ideally request the necessary information from the sellers regarding their purchase price and period of holding to determine the correct tax liability. This includes the date of acquisition, acquisition cost, and holding period.
- If the sellers provide the required information, the company can accurately determine the nature of the capital gains (short-term or long-term) and apply the relevant withholding tax rate.
2. **No Information Available**:
- If the sellers do not provide the information, the company might choose to apply the highest possible withholding tax rate applicable to avoid under-withholding. This conservative approach ensures compliance and mitigates the risk of potential penalties.
3. **Section 206AA Compliance**:
- Under **Section 206AA**, if the non-resident seller does not provide their Permanent Account Number (PAN), the withholding tax rate will be the higher of the rate specified in the relevant provision of the Act, rates in force, or 20%.
### Summary
Given the scenario where the company lacks information about the seller's purchase price and holding period, the company should:
- Deduct withholding tax under Section 195, applying the default rate applicable to capital gains.
- Consider the higher rate under Section 206AA if the seller does not provide a PAN.
- Seek professional advice to ensure compliance with the withholding tax requirements, considering potential DTAA benefits if applicable.
By following these steps, the company can fulfill its withholding tax obligations while mitigating the risk of non-compliance.
### Withholding Tax Liability
1. **Capital Gains on FCCBs**:
- The gains arising from the transfer of FCCBs by non-residents are considered capital gains under Indian tax laws. The specific treatment and rates depend on whether the gains are short-term or long-term, which in turn depends on the period of holding of the bonds.
2. **Withholding Tax Requirements**:
- According to **Section 195** of the Income Tax Act, any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of the Act (except for income chargeable under the head "Salaries") shall, at the time of credit or payment, whichever is earlier, deduct income tax thereon at the rates in force.
- Since the company does not have information about the seller’s purchase price or period of holding, it might be challenging to determine the exact amount of capital gains and thus the appropriate withholding tax rate.
### Determination of Withholding Tax Rate
1. **Default Rate**:
- In the absence of specific information about the capital gains, the company may consider the default withholding tax rate under Section 195. This default rate for long-term capital gains is typically **20%** plus applicable surcharge and cess. However, the exact rate may vary based on the nature of the gain (short-term vs. long-term).
2. **Double Taxation Avoidance Agreement (DTAA)**:
- If there is a DTAA between India and the country of residence of the bondholder, the provisions of the DTAA might provide a lower rate of withholding tax. The company would need to obtain a tax residency certificate (TRC) from the non-resident seller to avail of the benefits of the DTAA.
### Practical Considerations
1. **Request Information from Sellers**:
- The company should ideally request the necessary information from the sellers regarding their purchase price and period of holding to determine the correct tax liability. This includes the date of acquisition, acquisition cost, and holding period.
- If the sellers provide the required information, the company can accurately determine the nature of the capital gains (short-term or long-term) and apply the relevant withholding tax rate.
2. **No Information Available**:
- If the sellers do not provide the information, the company might choose to apply the highest possible withholding tax rate applicable to avoid under-withholding. This conservative approach ensures compliance and mitigates the risk of potential penalties.
3. **Section 206AA Compliance**:
- Under **Section 206AA**, if the non-resident seller does not provide their Permanent Account Number (PAN), the withholding tax rate will be the higher of the rate specified in the relevant provision of the Act, rates in force, or 20%.
### Summary
Given the scenario where the company lacks information about the seller's purchase price and holding period, the company should:
- Deduct withholding tax under Section 195, applying the default rate applicable to capital gains.
- Consider the higher rate under Section 206AA if the seller does not provide a PAN.
- Seek professional advice to ensure compliance with the withholding tax requirements, considering potential DTAA benefits if applicable.
By following these steps, the company can fulfill its withholding tax obligations while mitigating the risk of non-compliance.
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