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FAQs on Taxes and Related Issues

FAQs on Taxes and Related Issues

DTAA rates for royalty

XYZ Pvt Ltd, is a dealer in gem stones, and is exporting the goods to the overseas buyers and also to domestic buyers. It is making royalty payment to a Singapore Company in relation to use of brand name. Could you please let us know that whether the rate mentioned in DTAA i.e. 10 per cent should be further increased by surcharge or education cess or not?

The expression ‘tax’ is defined in Article 2(1) of the India-Singapore DTAA to include ‘income-tax’ and is stated to include ‘surcharge’ thereon, so far as India is concerned. The education cess is essentially of the same nature as surcharge, being an additional surcharge. Thus, the scope of Article 2 also extends to the education cess.

In view of the above, 10 per cent rate mentioned in India-Singapore DTAA in respect of royalty income should not be increased by surcharge and education cess.

Withhodling tax on shares

We are a partnership firm, engaged in the business of manufacturing and selling of polished diamonds and exporting the same. Recently, we have purchased shares of an unlisted Indian Company from a foreign company based in US. The foreign company was holding these shares for a period more than three years. What would be the withholding tax rate in this case?

Since the shares have been held for more than 12 months, the capital gain on sale of such shares shall be treated as long term capital gain for tax purpose. Further, as per amended section 112 of the Income Tax Act, 1961 (‘the ITAct’), the long term capital gain on sale of unlisted securities in case of Non-resident Investors shall be taxable at the rate of 10 per cent without giving benefit of indexation or of currenc. fluctuation.

Accordingly, tax should be withheld on the net capital gains at the rate of 10 per cent plus surcharge at the rate of two per cent if applicable and education cess of three per cent. However, if Permanent Account Number (‘PAN’) is not furnished by the US Company. then the tax should be withheld at the rate of 20 per cent as per Section 206AA of the IT Act.

Loan or deemed dividend

We, ABC Pvt Ltd, are engaged in the business of cutting and polishing of diamonds. Our managing director, who is also holding 55 per cent of share capital, wishes to take loan from company. Kindly elaborate as whether the said loan shall be considered as deemed dividend under Section 2(22) (e) of the IT Act?

Deemed dividend under section 2(22)(e) is attracted when a closely held company makes any payment by way of advance or loan to a shareholder, being the beneficial owner of shares holding not less than 10 per cent of the voting power. However, it is restricted to the extent of accumulated profit that such company posseses.

Based on the limited information, it appears that provisions of deemed dividend under section 2(22) (e) shall be applicable.

jewellery sale & cpital gains tax

Recently, I have sold gold jewellery worth Rs five lakhs after holding the same for almost two years. What is the capital gain index for financial year 2012-13? Is there any reinvestment option available to save the capital gains tax?

Since the gold jewellery has been held for less than 36 months, the gain on sale of such jewellery will be treated as short term capital gains. There is no tax saving reinvestment scheme available with respect to short term capital gains. However, you can claim deduction under section 80C (deduction in respect of life insurance premium, contribution to provident fund etc.) or under section 80D (deduction in respect of health insurance premium etc. from your gross total income.

House property & jewellery sales

I have brought forward loss under the head house property as per my income tax return. Currently, I am planning to sell some jewellery on which I will have some capital gain. Can I set off the brought forward loss of house property against such gain on jewellery?

Please note that the brought forward loss under the head ‘Income from house property’ can not be set off against any income except under the head income from house property. As such, you will not be able to set off the brought forward loss of house property against the capital gain on sale of jewellery.

jewellery gift in wealth tax

I had gifted certain amount to my wife on the occasion of our marriage anniversary. Out of the said sum, my wife bought some gold jewellery. Kindly let me know as whether the value of said jewellery will be included in the my net wealth or in the net wealth of my wife for wealth tax purposes for the assessment year 2012-13.

As per section 4(1)(a)(i) of the wealth Tax Act, 1957 the value of assets transferred directly or indirectly to spouse without adequate consideration (except where transfer is in connection with an agreement tc li ve apart) shall be clubbed in the net wealth of the husband.

Considering the above provision, the fair market value of the said gold jewellery as on 31 March 2012 shall be included in your net wealth.