The rising number of foreign companies and non-resident individuals has made it crucial to know who qualifies as a taxpayer in India. Section 9 of the Income Tax Act specifies the categories of income deemed to accrue or arise in India.
This post discusses Section 9 of the Income Tax Act and the subsections and exemptions under this section. Keep reading to get all the details!
Section 9 takes into consideration the “source of income” and expands on who qualifies as a taxpayer. As this Section decides who is a taxpayer based on the source of income, it does not consider the residential status and place of business of individuals. Lastly, even if an income does not accrue or arise in India, Section 9 can still deem the income as accruing or arising in India.
In its sub-sections, Section 9 covers various sources of income ranging from business connections to annual salary. Moreover, the government made amendments to this Section in 1976 to include the categories of interest, royalty, and technical fees.
Section 9(1)(i): Income Arising from a Business Connection in India
This sub-section discusses income arising/accruing from a business connection in India and income via the transfer of capital assets in India. First, let’s clarify what the term “business connection” means.
According to Section 9(1)(i), business connection refers to business activities carried out by an individual on behalf of a non-resident. The individual in question is a resident who:
Section 9(1)(i) states that any income from a business connection in India is deemed to accrue or arise in India. However, if a business does not have all its operations in India, only a part of its income will fall under taxation.
In conclusion, this Section applies to an intimate connection between a non-resident and a resident. Through this connection, there are profits or gains, and the non-resident earns an income that becomes taxable.
Apart from business connections, these are the types of income that are taxable under Section 9(1):
Here is a list of cases in which the Income Tax Department cannot levy taxes on income accruing or arising from business connections in India:
If a business activity is carried out by a broker, general commission agent, or other agents with an independent status, then their activity does not fall under the category of “business connection.” However, if these agents work for a principal non-resident, then they do not have an independent status. In this case, their activity is part of a “business connection”, and income from it is taxable.
A non-resident’s income from transactions limited to the purchase of goods for export is not said to accrue or arise from India. It also includes transactions made through agencies established in India.
The income of non-residents who run a business of news agencies or publish newspapers, magazines/journals is not said to accrue or arise from India. However, this is limited to the collection of news in India for transmission to other nations.
Income of individuals, firms or companies involved in the business of shooting a picture in India is not taxable. However, these non-residents have to be:
Income of any foreign company that is engaged in the business of mining diamonds in India is not taxable. However, this is limited to the display of uncut and unassorted diamonds in special zones mentioned by the Central Government.
Also Read: Online Income Tax Calculator
Section 9 of the Income Tax Act is a vital part of the Indian taxation system. Through the guidelines and regulations stated under this Section, the Indian government can increase its territorial nexus of tax laws. Even though there have been various contests against a few guidelines, this Section helps the government to levy taxes on incomes that accrue or arise in India.
Ans: Section 5 talks about the scope of the total income of a resident of India. It states that irrespective of the source of income, the total income of a resident from past years is deemed to accrue or arise in India.
Ans: Yes, there is a difference between business connections and permanent establishment. The former refers to a business activity carried out by a resident on behalf of a non-resident. Meanwhile, the latter refers to a fixed place of business where an enterprise carried out a whole or a part of its business.
Ans: For income tax liability, residential status refers to a taxpayer’s status with regard to how long they have stayed in India for the past five years. Accordingly, one can fall under the categories of resident, resident but not ordinarily resident, or a non-resident.
Ans: As per section 10(1) of the Income Tax Act, income from farming and agriculture is totally exempt from tax. It includes income from the farming land, buildings, and commercial produce. Furthermore, activities like poultry and cattle rearing also fall under agricultural income.
Ans: Government royalty refers to payments made by a company or individual to the government for conducting business or exploiting resources. For example, to mine gold in a country, the company or individual will have to give a certain percentage of their sales to the government as a royalty payment.
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