Section 9 of the Income Tax Act: Working, Subsections and Exemptions
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!
Understanding Section 9 of the Income Tax Act
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.
Sub-Sections Under Section 9 of the Income Tax Act
1. 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:
- Has the authority to finalise a contract in India on behalf of a non-resident. These contracts should be under the name of the non-resident.
- Plays the principal role of concluding contracts that serve the purpose of transfer of ownership of property owned by that non-resident.
- Has no such authority but maintains a stock of goods or merchandise and delivers it on behalf of the non-resident.
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.
2. Section 9(1)(ii) to Section 9(1)(vi): Income Arising from Other Sources
Apart from business connections, these are the types of income that are taxable under Section 9(1):
- Section 9(1)(ii): Salary from services rendered in India (including salary income from periods before and after rendering services that are part of service or employment contracts.).
- Section 9(1)(iii): Salary paid by the Government of India to citizens for services outside India.
- Section 9(1)(iv): Dividend paid by Indian companies, including those situated outside India
- Section 9(1)(v): Interest paid by the government. This Section also includes money borrowed or debt incurred by a resident for business carried on by such person outside India. Lastly, it covers money borrowed or debt incurred by a non-resident for business carried on by such a person in India.
- Section 9(1)(vi): Royalty paid by the government or technical fees paid for services used for business in India. However, this category does not include royalty or fees earned by using a computer supplied by a non-resident manufacturer.
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Exemptions under Section 9(1)(i) of the Income Tax Act
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:
1. Business Activity Carried out Through Agents
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.
2. Purchase of Goods in India for Export
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.
3. Business of Running a News Agency
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.
4. Business of Shooting Cinematograph Films in India
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:
- Not a citizen of India
- A firm with no partner as a citizen or resident of India
- A company with no shareholder as a citizen or resident of India
5. Foreign Company Engaged in Mining Diamonds
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.
Final Word
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.
FAQs
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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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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