Section 9A of the Income Tax Act, 1961 was introduced through the Finance Act, 2021 and has been effective from 1st April 2021. This section deals with taxation of income arising from transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer.
The main objective behind the introduction of this section is to widen the tax net and ensure that non-resident taxpayers pay their fair share of taxes on the income generated from transfer of shares or units of Indian companies or business trusts.
Key provisions of Section 9A:
- Applicability: Section 9A applies to non-resident taxpayers who transfer their shares or units of Indian companies or business trusts on or after 1st April 2021. The provisions of this section do not apply to resident taxpayers.
- Taxation: Any income arising from the transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer shall be deemed to accrue or arise in India and shall be taxable in India.
- Exemptions: Section 9A provides certain exemptions from taxation of such income. Any income arising from the transfer of shares or units of an Indian company or a unit of a business trust shall not be deemed to accrue or arise in India if the following conditions are fulfilled:
a. The transfer is undertaken by a Category I or Category II foreign portfolio investor (FPI) as defined under the Securities and Exchange Board of India (SEBI) regulations.
b. The transfer is undertaken on a recognized stock exchange located in any International Financial Services Centre (IFSC) in India.
- Computation of income: The income arising from the transfer of shares or units shall be computed in accordance with the provisions of the Income Tax Act and the rules made thereunder.
- Tax withholding: Any person responsible for paying to a non-resident taxpayer any sum chargeable under this section shall deduct tax at source at the rate of 20% on the gross amount of such sum. However, the rate of tax may be reduced as per the provisions of the relevant Double Taxation Avoidance Agreement (DTAA).
- Return filing: The non-resident taxpayer is required to file a return of income in India in respect of the income arising from the transfer of shares or units.
One of the key features of this section is the introduction of the concept of ‘deemed accrual’ of income in India. Previously, non-resident taxpayers were only taxed on income that was deemed to be received or deemed to have arisen in India. However, with the introduction of Section 9A, any income arising from the transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer shall be deemed to accrue or arise in India and shall be taxable in India.
This provision has been introduced to ensure that non-resident taxpayers do not escape taxation on their income generated from the transfer of shares or units of Indian companies or business trusts. By deeming such income to accrue or arise in India, the government can tax such income at the applicable rates and ensure that non-resident taxpayers pay their fair share of taxes.
Another important aspect of Section 9A is the exemptions provided for Category I and Category II foreign portfolio investors (FPIs). FPIs are institutional investors who invest in the financial markets of India. Category I FPIs include sovereign wealth funds, central banks, and government-related entities, while Category II FPIs include mutual funds, investment trusts, and asset management companies.
The exemptions provided for Category I and Category II FPIs are intended to encourage foreign investments in India. By exempting them from tax on income arising from the transfer of shares or units of Indian companies or business trusts, the government can make it more attractive for foreign investors to invest in the Indian market.
In addition to the exemptions provided for FPIs, Section 9A also provides for tax withholding at the rate of 20% on the gross amount of income arising from the transfer of shares or units of Indian companies or business trusts by non-resident taxpayers. This is intended to ensure that taxes are collected at the source and to simplify the process of tax collection.
In conclusion
Section 9A of the Income Tax Act, 1961 is a significant step towards ensuring that non-resident taxpayers pay their fair share of taxes on the income generated from the transfer of shares or units of Indian companies or business trusts. The introduction of this section will help bring more clarity and certainty in the taxation of such income and will also encourage foreign investments in India.
Frequently Asked Questions (FAQs)
Q:1 What is Section 9A of the Income Tax Act?
A: Section 9A of the Income Tax Act, 1961 was introduced through the Finance Act, 2021 and deals with the taxation of income arising from the transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer.
Q:2When did Section 9A of the Income Tax Act become effective?
A: Section 9A of the Income Tax Act became effective from 1st April 2021.
Q:3 Who does Section 9A of the Income Tax Act apply to?
A: Section 9A of the Income Tax Act applies to non-resident taxpayers who transfer their shares or units of Indian companies or business trusts on or after 1st April 2021.
Q:4 How is the income arising from the transfer of shares or units taxed under Section 9A of the Income Tax Act?
A: Any income arising from the transfer of shares or units of an Indian company or a unit of a business trust by a non-resident taxpayer shall be deemed to accrue or arise in India and shall be taxable in India.
Q:5 Are there any exemptions provided under Section 9A of the Income Tax Act?
A: Yes, Section 9A provides certain exemptions from taxation of such income. Any income arising from the transfer of shares or units of an Indian company or a unit of a business trust shall not be deemed to accrue or arise in India if the transfer is undertaken by a Category I or Category II foreign portfolio investor (FPI) as defined under the Securities and Exchange Board of India (SEBI) regulations, or if the transfer is undertaken on a recognized stock exchange located in any International Financial Services Centre (IFSC) in India.
Q:6 What is the rate of tax withholding under Section 9A of the Income Tax Act?
A: Any person responsible for paying to a non-resident taxpayer any sum chargeable under this section shall deduct tax at source at the rate of 20% on the gross amount of such sum.
Q:7 Is the non-resident taxpayer required to file a return of income in India?
A: Yes, the non-resident taxpayer is required to file a return of income in India in respect of the income arising from the transfer of shares or units.
Q:8 What is the objective behind the introduction of Section 9A of the Income Tax Act?
A: The main objective behind the introduction of Section 9A of the Income Tax Act is to widen the tax net and ensure that non-resident taxpayers pay their fair share of taxes on the income generated from transfer of shares or units of Indian companies or business trusts.
