Tax Regulations For Conducting Business

Taxation for business activities in India by Non-Resident Indians is covered under the provisions of the Income Tax, Act, 1961 as well as by the Foreign Exchange Management Act (FEMA).

KEY POINTS:

• Holding investments in India or engagement in a partnership business in India by a Non-Resident is regulated by FEMA Law. Normally, a Non-Resident is not allowed to carry on partnership business in India without the prior approval of the Reserve Bank of India (RBI) and subject to certain conditions, but Non-Residents who have been in partnership business since the time they were residents in India can continue to do so.
• Non-Resident Indians may continue to hold assets in India that they may have acquired prior to the change of status. They will be liable to be taxed under the Income Tax Act, 1961 in respect of the income earned in India after conversion of their status as Non-Resident. However, for individuals who are Indian Residents under the Income Tax Law, 1961, all income, whether earned in India or outside, is taxable in India.

Q) I intend to start a business with my brother-in-law, who is stationed in the US. I propose to form a company and have my brother-in-law and myself as directors. Is this permissible? Are any special permissions required for the same?

- Ganesh Bandekar, Mumbai

Reply - 

You may do business with your brother-in-law by forming a company under the Companies Act, 1956. Though you need not take any prior approval to appoint your brother-in-law as director of the proposed company, you will be required to take approval of the RBI if and when you propose to allot shares in the company to him.

Further, you will have to also take approval if you propose to pay any remuneration which is to be repatriated abroad or paid abroad.

Q) I am an Indian citizen and was previously engaged in business in India. Now, I have migrated to the Middle East, have settled there and established a new business. However, I have continued as partner in the business in India. Can I continue with my business here and have assets in India even though I have now become a Non-Resident Indian?

- Kushal Bhanushali

Reply - 

It may be noted that the residential status of an individual is based on his/her physical presence in India under the Income Tax Act, 1961, whereas under the Foreign Exchange Management Act (FEMA Law), the residential status is based on the intention of the person. Thus, if you proceed to Middle East making a declaration that you wish to settle in the Middle East, you shall be termed as a Non-Resident under the FEMA Law. However, in order to have Non-Resident status under the Income Tax Act, 1961, your physical presence in India matters.

Holding investments in India or engagement in a partnership business in India by a Non-Resident is regulated by FEMA Law. Normally, a Non-Resident is not allowed to carry on partnership business in India without the prior approval of the Reserve Bank of India (RBI) and subject to such conditions as may be prescribed. However, as you have been in partnership business since the time you were a resident in India, you can continue to do so. Any new investment in a partnership firm will require approval from the RBI. Also, you will not be able to repatriate your profits or the capital without the approval of the RBI.

You can also continue to hold assets in India that you may have acquired prior to the change of status to Non-Resident. You will be liable to be taxed under the Income Tax Act, 1961 in respect of your income earned in India after conversion of your status as Non-Resident. However, if you are a Resident in India under the Income Tax Law, 1961, all income, whether earned in India or outside, is taxable in India.