As per the Liberalized Remittance Scheme (LRS), an Indian citizen can ship $250,000 per 12 months. Can this quantity be used for investments in futures & choices (F&O) buying and selling on worldwide listed derivatives. For instance, can a buying and selling account be opened with a global dealer in overseas geography to commerce alternate merchandise comparable to S&P 500 futures, crude oil choices, gold, Comex (F&O marketplace for commodities), and so on. What is the taxation if the account is opened in Dubai, UAE or Singapore; jurisdictions which have double taxation avoidance settlement (DTAA) with India?
—Name withheld on request
Remittances below LRS are allowed solely in respect of permissible capital or present account transactions or a mix of each. However, funding in abroad derivatives just isn’t a permitted capital account transaction since it’s prohibited below the abroad portfolio funding guidelines. Further, transactions within the nature of remittance for margins or margin calls to abroad exchanges/abroad counterparty are additionally not allowed below LRS. Therefore, you wouldn’t be permitted to remit funds below LRS for F&O buying and selling outdoors India.
As to the query of whether or not a buying and selling account may be opened with a global dealer in overseas geography to commerce alternate merchandise, such transaction just isn’t permissible below FEMA (Foreign Exchange Mangement Act) within the first place. However, the actual fact of illegality is immaterial for the aim of taxation below the Indian tax regulation. The tax division just isn’t involved with the taint of illegality of the earnings or its supply. Thus, a taxpayer could also be prosecuted for an offence and concurrently be additionally taxed on the earnings arising from the unlawful transaction.
Being an Indian tax resident, your worldwide earnings turns into chargeable to tax in India. The distributive guidelines below a DTAA assign to every respective nation, the suitable to tax particular class incomes that come up within the supply state. Such rights could also be unique taxing rights or shared taxing rights between each nations. However, a DTAA can not take away the suitable of the resident nation to tax its personal residents besides below restricted circumstances. Granting overseas tax credit score by the resident nation is one such circumstance whereby below DTAA obligations, it must grant overseas tax credit score to its personal taxpayer.
Thus, whereas your worldwide earnings together with the earnings earned in UAE or Singapore from F&O buying and selling can be liable to taxation in India, you could take the advantage of the respective DTAA to avail overseas tax credit score in India towards the earnings tax chargeable on such earnings below the Indian tax regulation.
When it involves the taxation below the Indian tax regulation, the earnings earned from F&O buying and selling exercise (in shares, shares and commodity) that’s carried out outdoors India can be characterised as enterprise earnings and particularly from a ‘speculation business’, since it will be carried out on a inventory alternate positioned outdoors India which don’t qualify as ‘recognized stock exchanges’.
However, if the F&O buying and selling exercise leads to a loss, then there are restrictions on set-off and carry ahead of losses from the hypothesis enterprise. Loss in a speculative enterprise may be set-off solely towards earnings from speculative enterprise and pending full set-off, it may be carried ahead just for 4 consecutive evaluation years.
Harshal Bhuta is associate at P.R. Bhuta & Co. Chartered Accountants.
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Updated: 14 Sep 2023, 10:34 PM IST