querry

[A N GAWADE & CO]

Hi

We have received the below query from one of our clients who is a U.S. National but has been atax resident of India for over 10 years.  He has some assets and income in the U.S. but most of his assets and income are in India where he spends over 80% of his time. His query is as under:-

 

1.     I purchased shares of XYZ Bank between 2006 – 2009 and sold them in 2010 making a profit of Rs. 3,15,86,004/-.  This profit is not taxable in India as it is a long term capital gain.

 

                      Query:  Do I have to report this as a capital gain income for my U.S. Tax return.  It appears to me that as per the U.S. India Double Taxation Agreement Article 13, I should not be paying capital gain in the U.S on this sale.

2.     ABC shares – I purchased shares of ABC, a Private company incorporated in the U.S.   I had bought 280,000 shares for USD 99,999.50 on April 26, 2010 and sold these shares for USD 652,400 on Sept. 28, 2011, with a gain of USD 552,400.  Will this gain be taxable in India or in the U.S. as a capital gain?

 

Article 13 of the Indo-USA Tax Treaty reads as under:-

 

ARTICLE 13 - Gains - Except as provided in Article 8 (Shipping and Air Transport) of this Convention, each Contracting State may tax capital gains in accordance with the provisions of its domestic law.

 Upon a reading of Article 13, there appears to a right to tax which vests with the other contracting state, but not a mandatory taxation of the Capital Gains arising in the other Contracting State. The words being used are “may tax” which need not necessarily imply mandatory taxation. Please confirm if you have come across such a case and what is the meaning assigned to the words “may tax”.

 

1. In case one, the domestic laws of India will exempt any payment of taxes on the long term capital gains, however considering the person to be a citizen of USA, presumably domestic tax laws of USA will tax this capital gain. Please confirm.
2. Additionally, will it make a difference if his residential tax status is that of a “Non-Resident Alien” as per the US Taxation Laws.
3. Similarly, in case two, USA will levy tax on the capital gains considering the “source rule” of taxation, however again the taxation of the same in India will depend on the meaning assigned to the words “may tax” as per Article 13.

 

Any response in this regard would be highly appreciated.

CA Anand Gawade
Managing Partner

A N GAWADE & CO. Chartered Accountants,
Office Add: Office No 1, Shree Shailya Apartment,
Lane No 14, Prabhat Road, Pune-411004.
Tel Fax 020+25459205 Cell: 98223 48948
Email: a...@angca.com, anga...@gmail.com
Web:    www.angca.com

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