Section 196D deals with tax deducted on income in respect of securities referred to in clause (a) of Sub-section (1) of Section 115AD. Any person making payment to Foreign Institutional Investors shall, at the time of credit of such income to the account of payee or at the time of payment in cash, cheque/draft, etc whichever is earlier shall deduct tax @ 20% on such income.
Section 115AD, of the Income Tax Act, 1961, deals with Tax on income of Foreign Institutional Investors from securities [excluding dividend income which is exempt u/s 10(34) and income from units of mutual fund which is exempt u/s 10(35)] or capital gains arising from their transfer. The section provides that the word “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956.
The section further defines the expression “Foreign Institutional Investor” – means such investor as the Central Government may, by notification in the Offical Gazette, specify in this behalf.
Further the Ministry of Finance, Department of Economic Affairs (Investment Division), has clarified through a Press Note that the FIIs are registered with the Securities and Exchange Board of India will be automatically notified by the Central Government for the purposes of section 115AD. [Press Note: F.No.5(13) SE/91-FIV, dated 24-3-1994]
Futher section 196D of the Income Tax Act, 1961 prescribes the rate of tax deduction at source (TDS) for income referred to in section 115AD(1)(a), i.e. on income in respect of securities. It further states that there will be no TDS on capital gains arising under section 115AD(1)(b). It has been clarified in the press note given above that in order that the tax on capital gains arising to FIIs can be realised, each FII, while applying for initial registration with the Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-tax Act for the said purpose. Thus FII’s have to meet the obligations of the Advance Tax liability arising within India as per the provisions of Part C of Chapter XVII of the Income Tax Act 1961. Futher FII’s claim TDS (witholding tax) credits in the respective countries as per the provisions of DTAA or respective tax laws prevailing in that country.
Any ‘non-residents’ can approach “Advance Rulings Authority” under Chapter XIX-B of the Income Tax Act, 1961, to determine the tax implications in India for the transaction proposed to be entered.
Reference:
Insertion of new section 196D.
After section 196C of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 1993:
As Per Section 196D, of the Income Tax Act, 1961-
Income of Foreign Institutional Investors from securities.
28. (1) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent;
Provided that no such deduction shall be made in respect of any dividends referred to in section 115-O.
(2) No deduction of tax shall be made from any income, by way of capital gains arising from the transfer of securities referred to in section 115AD, payable to a Foreign Institutional Investor.
Amendment of section 196D.
49. In section 196D of the Income-tax Act, in sub-section (1), for the words, brackets, letters and figures “any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD is payable”, the words, brackets, letters and figures “any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable” shall be substituted with effect from the 1st day of June, 2013