TaxTMI 
TaxTMI 
Enforcement of Tax Recovery from Non-Residents : Clause 422 of the Income Tax Bill, 2025 Vs. Section 173 of the Income-tax Act, 1961
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....s, and their place within the broader context of tax recovery mechanisms for non-residents. Objective and Purpose The primary objective of both Clause 422 of the Income Tax Bill, 2025 and Section 173 of the Income-tax Act, 1961 is to provide the Indian tax authorities with effective tools to recover tax dues from non-residents who derive income that is taxable in India. The legislative intent is to prevent tax evasion and avoidance by non-residents who may otherwise be beyond the direct reach of Indian enforcement mechanisms. These provisions also recognize the practical difficulties in enforcing Indian tax claims against persons who do not reside within the country, and who may not have substantial or permanent assets in India. Historically, the globalisation of commerce and the increasing participation of non-residents in the Indian economy-whether through investment, business operations, or other means-has necessitated robust statutory provisions to secure the collection of taxes. The provisions are also a response to the potential for non-residents to structure their affairs in a manner that could frustrate the collection of legitimate tax dues, especially where assets are h....
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....t mechanism is the recovery of tax by way of deduction under the relevant provisions (Chapter XIX-B or XVII-B). This refers to the system of Tax Deducted at Source (TDS), whereby the person responsible for making a payment to a non-resident-a payer-deducts tax at the applicable rate before making the payment. This ensures that tax is collected at the source of income, mitigating the risk of non-recovery at a later stage. * The obligation to deduct tax at source is typically imposed on agents, representatives, or any person responsible for paying income to a non-resident. The provision clarifies that this recovery may be effected "whether in his name or in the name of his agent who is liable as a representative assessee," thus extending the liability to agents or representatives within India. * Recovery from Assets within India: * The second mechanism provides for the recovery of any arrears of tax from the assets of the non-resident that are, or may at any time come, within India. This is a critical provision, as it enables the tax authorities to enforce tax claims against any property, bank accounts, securities, or other assets that the non-resident may own or acquire in Ind....
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....lementary and do not override or limit the application of other sections dealing with assessment or recovery from representatives. * This drafting approach ensures that the tax authorities can pursue multiple avenues for recovery without being constrained by the procedural requirements of other sections. It reflects a legislative intent to maximize the effectiveness of tax collection from non-residents. 6. Ambiguities and Issues in Interpretation While the provisions are broadly drafted, certain ambiguities or interpretative challenges may arise: * Definition of "Assets": The provisions refer to "any assets" of the non-resident within India. The term "assets" is not exhaustively defined and could encompass a wide range of movable and immovable property, bank accounts, shares, securities, etc. This broad language is intended to prevent non-residents from evading tax by holding assets in forms or structures not expressly mentioned in the statute. * Timing of Acquisition: The phrase "which are, or may at any time come, within India" extends the scope of recovery to assets acquired in the future. This could raise issues regarding the tracing and identification of such assets, e....
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.... deduction and deposit of TDS, and cooperation with the tax authorities in the identification and recovery of assets. * Procedurally, the tax authorities are required to follow the due process prescribed under the Act for attachment, seizure, and sale of assets. Non-residents and agents have the right to contest recovery actions and to seek relief under applicable provisions. 4. Enforcement Challenges * While the provisions are comprehensive, practical challenges may arise in the identification, tracing, and attachment of assets, especially where non-residents hold assets through complex structures or intermediaries. The global mobility of assets and the use of digital currencies may further complicate enforcement efforts. * International cooperation, including information exchange and mutual assistance in tax recovery, may be necessary in certain cases, particularly where assets are located outside India or are held through cross-border arrangements. Comparative Analysis 1. Comparison with Other Jurisdictions * Many jurisdictions have similar provisions for the recovery of tax dues from non-residents, typically by way of source-based taxation and attachment of local ass....