Section 9 Of The Income Tax Act

Income taxed by any country depends on two factors, which are whether the income is earned or received in that country. The Income Tax Act 1961, Section 9 states that the income should be deemed to accrue or arise in India. It is especially applicable to the income that non-residents or foreign entities earn or are considered (deemed) to have earned in India.

As Indian's economy is growing, many foreign entities and non-residents are considering investing in it, and it has become essential to know who qualifies as a taxpayer in India. Hence, Section 9 of Income Tax Act states he categories of income deemed to accrue or arise in India.

This blog will discuss the sections and exemptions under Section 9, and by the end, you will have an understanding of the income that is deemed to arise or accrue in India.

Understanding Income Tax Act Section 9?

According to Section 9 of Income Tax Act, the source of income categories who is regarded as taxpayers in India. The section administers the income that is deemed to have arisen or accrued in India. The section has established transparency in income taxation and simultaneously avoided tax evasion. Lastly, even if the income is not accrued or arisen in India, this section deems the income to have accrued or arisen in India for taxation.

The income arising in India can be irregular for various sources, including foreign income, capital gains, salaries, property income, and earnings from lotteries or horse racing. The government of India has further amended this section to incorporate income categories, such as interest, royalty, and technical fees.

Rules of Section 9 of the Income Tax Act

Under Section 9 of Income Tax Act, three provisions determine the tax implications for non-residents and foreign residents on their income.

Territorial Nexus Rule: Any income that arises or is deemed to arise in India through foreign entities or non-residents is subjected to tax. This rule applies to all types of income sources, including capital gains, interest, business earnings, and other similar types of income.

Specific Inclusions Rule: This rule of Section 9 applies to the following types of income: interest, royalties, and fees (whether technical services are obtained from India or provided in India). The rule clearly states that the income is deemed to arise in India, so the tax implications are stated upon it.

Residence Rule: According to this rule, any income earned or accrued outside India shall not be subject to tax in India. The condition to fulfil this rule is that the recipient of such income should not be a resident of India. This means that if a non-resident earns income abroad, it is not taxable in India.

What is the Scope of Section 9 of the Income Tax Act?

Section 9 of the Income Tax Act in India applies to different sources of income that non-residents or foreign entities earn in India.

• It includes income obtained from:
• Any salary earned in India
• Any business or profession executed in India
• Any property located in India
• Any individual disturbed by an Indian firm.
• Any source of asset or income that is located in India.
• Any interest earned on securities that are surrendered by either the government of India or an Indian company.

The Scope of the Income Tax Act, Section 9, Also Includes:

• Royalties or fees for technical services given in India.
• Any capital gain generated from the trade of any asset located in India, be it directly or indirectly.
• Gift to non-resident in the form of money.
• Income earned from salaries that are payable by the government of India for the services rendered outside India.
• Money paid by an Indian resident to a foreign entity or a non-resident or an RNOR, resident but not ordinarily resident in India.

What are the Implications of Section 9?

Section 9 has various implications for non-residents or foreign entities running business in India: 

Withholding Tax: According to section 195 of the Income Tax Department of India, any person accountable for paying a sum to a non-resident must deduct tax at source. The tax rates for TDS depend on the type of income and the provisions associated with DTAA (Double taxation avoidance agreement) (if applicable).

Taxation of Income: Any type of income that a non-resident or a foreign entity earns from a business or assets is taxable in India. The tax rate for such depends on the income tax slab rates applicable for that particular financial year.

Provision of Section 9

Let's explore the various subsections that fall under Section 9 of the Income Tax Act.

a) Section 9(1)(I): Income Accuring/Arising from a Business Connection in India or from any property in India, or from any asset or source of income in India, or the transfer of a capital asset situated in India.

This section specifies that any income made from a business connection in India is deemed to arise or accrue in India. However, if a business does not conduct all the operations in India, only a part of its income will have tax implications.

In a nutshell, Section 9(1)(i) involves an intimate connection between a non-resident and a resident. According to this connection, there are gains or profits, and a non-resident earns taxable income.

Section 9(1)(ii) to Section 9(1)(vi): Income Arising From Other Sources:

This section also includes income from sources other than business connections, which are taxable.

Section 9(1)(ii): It includes salary from services that have been rendered in India, which include salary income from periods before and after the services have been rendered that are part of either the service or the employment contracts.

Section 9(1)(iii): It includes salary that the Indian government pays to citizens for services outside India.

Section 9(1)(iv): Dividend that Indian companies have paid, including those that are situated outside India.

Section 9(1)(v): Interest that the government has paid. This section includes debt incurred or money borrowed by a resident for business carried on outside India. 

Section 9(1)(vi): This subsection includes royalty paid by the government of India and the technical fees paid for services that have been used for business in India. However, this subsection does not include fees or royalties earned by raising a CI outer supplied by a non-resident manufacturer.

Tax Exemptions Under Section 9(1)(i)

Belo is a loss if the cases that are taxable by the Income Tax Department depend on income arising or accruing from business connections in India.

1: Business Activities Carried Out Through Agents

Suppose a broker, general commission agent, or any other agent with an independent status carries out any business activities. In that case, those activities will not fall under the category of a business connection. However, if these agents work for a principal who is not a resident, then they do not have independent status. Hence, in such cases, their business activities are a part of a business connection, and the income generated through it becomes taxable.

2: Purchase of Goods in India for Export

If a non-resident generates income from transactions limited to the purchase of goods for export, it is said to arise or accrue from India. This also includes transactions done through established Indian agencies.

3: Business of Running a News Agency

Suppose the income of a non-resident is generated through the business of news agencies or by published magazines, journals, or newspapers. In that case, it is said to accrue or arise from India. However, it is restricted to collecting news in India and transmitting it to other nations.

4: Shooting Cinematography Filming in India

Individuals, corporations, or firms that are involved in the business of shooting films and pictures in India do not have the income generated through this business activity taxable. However, to have the income to be non-taxable, the non-residents have to be

• Not a citizen of India.
• A firm or corporation with no partner as a resident or citizen of India
• The company has no shareholders who are either residents or citizens of India.

5: Foreign Company Engaged in Diamond Mining

Incomes generated through any foreign company engaged in the mining business in India are not taxable. However, this is limited to unassorted or uncut diamonds, especially in areas governed by the central government.

Conclusion

Section 9 of the Income Tax Act is a crucial aspect of income taxation for foreign entities and non-residents. Through the regulatory framework and guideline specified under this section, India's movement aims to increase the territorial nexus of tax laws. In brief, Section 9 enables the government to impose taxes on incomes that arise or accrue in India.