LIVE GST Certification Course by CA Arun Chhajer begins 27th April. Register Now!!

Income Tax on Foreign Income?

Ibrahim (N/a) (28 Points)

18 October 2009

Hello,

I'm a self-employed web developer located in Mumbai. I'm a full-time freelancer earning all my income in US Dollars from various clients. I have a US bank account where all those funds accumulated and at the end of the month I withdraw it using my Debit card and deposit in my Indian bank account.

To reiterate, I live and work from India, but my clients are all foreigners and my income generates in a US Bank.

I'd like to know what is my tax status. Do I have to pay income tax although my income is in foreign currency or any other rule(s) apply?

I would really appreciate your comments and advices.

Thanks & Regards.

Reply
Follow
Share

25 Replies

(Guest)

Hi Ibrahim,

Well it doesnt matter from where ur income generates.Since u r a resident of India, u will be liable to pay tax in India for ur worldwide income whether u bring that income in India or not.

Regards

Poonam Thanvi

Ibrahim (N/a) (28 Points)
Replied 18 October 2009

Originally posted by :Poonam Thanvi
"	Hi Ibrahim, Well it doesnt matter from where ur income generates.Since u r a resident of India, u will be liable to pay tax in India for ur worldwide income whether u bring that income in India or not. Regards Poonam Thanvi	"

That sounds so wrong, and is infact so very wrong! (Not your response, the law I mean)

Albert Einstein said and I quote here "The hardest thing in the world to understand is the income tax".

(Guest)

Afterall its law and u have to accept it whether its fair or not

1 Like

Max Payne (employed) (2569 Points)
Replied 18 October 2009

If u have STPI registration, then u can claim massive exemptions for turnover, deductions u/s 10B for the export turnover.

santhosh (Student) (1174 Points)
Replied 18 October 2009

I hope that you will get credit under Double Tax Aavoidance Agreement....

Anurag (stusent) (63 Points)
Replied 18 October 2009

since u r a resident in india u will have to pay tax on global income (ay income earned by u worldwide)

and even if u would not have been living in india and if ur status was resident and ordianrily resident then also u would have to pay tax as it is income from business connection and if

u were a non resident u would not pay any tax in india

Sunil (Trader) (2611 Points)
Replied 18 October 2009

Firstly have you given your W8BEN (I do not know the exact form number, but we normally submit this form to a US Payer if we do not have any setup in USA). This form is required by payer in order not to deduct witholding tax. having a bank account or fax / telephone in USA does not make you have a PE in USA. But if you have a fixed address in USA, for business income only USA has the right to tax as per DTAA. For Professional Fees and Included services both have right to tax.

In order for your business income not to be taxed in USA, you should not have a PE in USA. However, if USA law specifies that tax should be deducted on your included professional services that you have rendered it will be deducted and if your Form W8BEN is accepted, then they may not deduct witholding tax if your income is not to be taxed in USA.

Now whether your income has suffered tax in USA or not, you being resident of India, your global income is taxable in India. Say you received 25000 dollars in the year in USA and 5000 was witheld for witholding tax in USA. The Indian Government will take your income as $ 25000 only. Finally after all your allowable expenses for generating this income, it determines that your tax liability is USD 5000 for Indian taxes on this income, you pay nothing as you get a relief for USA witholding tax. If your Indian tax ON THIS INCOME works out more, you pay the difference. If it works out less, you get back NOTHING from India.

Sounds simple? Yes, but cumbersome in practice. Please get your CA to fill the return. Even if you have to compulsorily file it online, ge t him to generate your xml file for uploading.

2 Like

Ibrahim (N/a) (28 Points)
Replied 18 October 2009

@ Sunil, Thanks for the detaield response.

Yes, I have filled a W8BEN form with my banker so I'm exempted from US tax (which would've been 10x than the Income tax here anyway).

But I didn't quite get this: "you pay nothing as you get a relief for USA witholding tax" <– Do you mean that if I pay tax in the USA, then only I'm exempted from Income tax in India?

Ajay Mohanty (Accounts Manager) (94 Points)
Replied 18 October 2009

Dear I m not clear about the income tax on foreign income ?

can u plz assist me on this matter ?

Sunil (Trader) (2611 Points)
Replied 18 October 2009

If your income suffered a deduction of US Tax, you would have got RELIEF and not REFUND from the Indian Government on Indian Taxes. The Indian Government only gives you tax credit to the extent of Indian tax on the income. If the tax you suffered in US is more than the tax in India, Indian government gives you back nothing. On the contrary if it is less than the tax in India, the Indian Government will demand the difference.

As you have not suffered any tax in USA on account of W8BEN, you pay your entire Indian Income Tax as per your P&L Account. You do have to follow procedures for Section 195 for TDS. If you have directly paid out any money from your USA account (I assume it is with permission of RBI to hold this account, check FEMA laws), in case you have paid anyone for income deemed to be taxable in India, eg royalties, professional fees etc.) you should have deducted or grossed up the Indian income tax and deposited it u/s 195 in India. Then only the amount will be allowed as expense to you in your income tax in India. If you have a bill of $500 for a professional fees (that includes technical, managerial or secretarial service) then you should have deducted 20% and paid $400 and deposited $100 as TDS in India. This is applicable even if you pay directly from your USA account. You can pay the tax in India in Rupees. However, if you pay full $500 to the US entity, your expense will be allowed only if you pay $125 as the indian tds. That is meaning of grossed up tds. However, I am not sure whether you will be allowed $500 or $ 625 as your expenditure. As the bill itself is for $500, usually you will be allowed only the bill amount. I am not sure if they allow you the tds amount what you bear from your pocket.

In short friend your case is beyond this forum and you need a qualified tax professional to handle it for you. I am not a qualified tax professional. Therefore please do not go wholly by my views. What I have given you is a very general view that a layman is expected to know while doing business or carrying out his profession. To do the actual work you need the professional help in your case especially if your receipt is above 10 lakhs and 44AB audit is required.

1 Like

Sunil (Trader) (2611 Points)
Replied 18 October 2009

Please sir note that in issuing the US Government the W8BEN you have inadvertently subected yourself to Indian tax jurisdiction being resident of India for the entire income you earned in USA. See the wordings of your W8BEN what you declared to USA. If you are not of their jurisdiction which you have declared to them to the best of your knowledge and belief, you are entirely of Indian jurisdiction and all sections of Indian Income tax, that includes TDS etc. are applicable to you.

I am not sure whether you have to register with service tax in case your turnover is over 9 lakhs. If you have to, you can claim deduction as export of services only for what you bring to India in convertible FOREX. Therefore, you should use USA account only for convenience of receiving your money, transfer all of it to India and then remit whatever you have to from India only to anywhere in the world where you incur expenses after complying with TDS procedures. You would have to also pay service tax on reverse charge mechanism even for bank charges incurred in USA. For that it is not even necessary to have turnover of 9 lakhs. Even if you pay $1 also you deposit 10c service tax in india for bank charges.

Therefore friend, please visit a CA.I am sure you have wrongly assumed that since your receipts are in USA you have no liability here in India.

1 Like

santhosh (Student) (1174 Points)
Replied 18 October 2009

very nice sunil sir.... you are rit....

Nitin Grover (CS) (1228 Points)
Replied 24 October 2009

Dear Friend

in this case if u r ROR as per income tax act, 1961 then u have to pay tax on total income and u have u check abt the provisions of Double Taxation i.e Section 90 & 91 of Income TAx Act, 1961 because it will give relief to you

and in your case income in dollar eqvivalent to Indian rupees

Thanks

Nitin Grover

Sunil (Trader) (2611 Points)
Replied 24 October 2009

You are right Nitin. The problem here is that you cannot go to Government of contracting state with their witholding tax exemption form (in this case the W8BEN and tell them that their tax laws are not applicable because he is non resident and then come to your resident state and tell them that income is deemed to accrue abroad and therefore not taxable here. You have to be taxed in at least one jurisdiction.

With Ibrahahimji, it seems he is taxable first in USA as he seems to have a resident bank account in USA and not an international one opened as per our prevalent FEMA Act. You do not give W8BEN to bank. It is given to the person who pays you. Obviously he has made himself out to be a resident to the entities paying him and they may not have deducted witholding tax on his payments. Then he has issued the W8BEN to his bank in USA for the remittance he has made to himself in India.

Many residents in India having NRI relatives in USA or England make these kind of errors. No Government whether of India or the developed world ever enter into a pact with an individual to avoid tax at other jurisdiction in order to pay at their own juridiction. I do not say Ibrahimji has done something criminal. However, he is of belief (I do not call it bonafide belief) that he is taxable nowhere. Therefore somewhere down the line he would have done a wrong representation to any one of the 2 governments. In this case, being resident in India he cannot escape Indian tax. For whatever he has avoided in USA, IRS is smart and will eventually get him though his debtors/assets in USA. The State in USA where he operated his business will recover its VAT on reverse charge mechanism from his clients. He is liable to register for service tax here and claim exemption on exports if his turnover crosses the treshold.

One must study the law of both states in foreign business especially if you hold and maintain assets in the contracting state.