Taxation of Agents

Taxation of Agents

An 'agent' is a person who agrees and is authorized to act on behalf of another. This another person is known as 'Principal' who authorizes and empowers the agent as his representative to carry out his legal acts. When the agent and the principal mutually agree, an 'agency relationship' starts between them. This relationship empowers the agent to carry out business transactions on behalf of the principal. Infact while dealing with the third parties, the agent steps into the shoes of his principal and all his legal acts are binding on the principal.

An agent can be an individual, a company or any association of individuals. The document which empowers the agent is known as 'Power of Attorney', which is executed by the principal in favour of the agent. When the power of attorney relates to a particular transaction and for a specific purpose, it is known as 'Specific Power of Attorney'. Whereas, when power of attorney relates to transactions in general, it is known as 'General Power of Attorney'. The power of attorney may or may not be registered.

An agent enjoys all the powers of the principal and binds the principal for all his legal acts. He can sue the third parties in the name of the principal and has a right to get reimbursement for the expenses incurred by him related to the business. But at the same time, an agent should act as per the powers vested in him and should act in the best interests of his principal. He should maintain proper accounts of all transactions and submit them to the principal.

Provisions for Taxation of Agents

An agent is subjected to taxation under the provisions of the Income Tax Act,1961. It is the umbrella Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate rules ( The Income Tax Rules,1962 ) for implementing the provisions of the Act. The CBDT is a part of Department of Revenue in the Ministry of Finance . It has been charged with all the matters relating to various direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department . The Income Tax Act is subjected to annual amendments by the Finance Act , which mentions the 'rates' of income tax and other taxes for the corresponding year.

An agent may be taxed depending upon the category of "persons" in which it falls under the Income Tax Act. The term "person" under the Act includes:-

  • Individuals
  • Corporates
  • Firms
  • Association of Persons or Body of Individuals
  • Hindu Undivided Families

Assessment of non-residents through Agents

A non-resident may be assessed to tax in India either directly or through agents. Under the Income Tax act (Section 163), there is a provision to assess a non-resident through his agent due to the inherent difficulties in ensuring his physical presence during the assessment proceedings and the possibilities of effecting recovery of the due taxes.

Persons in India who may be treated as 'agent' of a non-resident are:-

  • Employee or trustee of the non-resident
  • Any person who has any business connection with the non-resident
  • Any person from or through whom the non-resident is in receipt of any income
  • Any person who has acquired a capital asset in India from the non-resident.

If a person is assessed as an agent, he may retain out of any money payable by him to the person residing outside India on whose behalf he is liable to pay tax (the principal), a sum equal to his estimated liability. In case of any disagreement between the principal and the agent regarding the amount to be retained, the agent may secure from the assessing Officer a certificate stating the amount to be retained pending final settlement of the liability, and the certificate obtained will be his warrant for retaining that amount.

Wealth Tax and Agents

Wealth tax is a direct tax, which is charged on the net wealth of the assessee. ' Assessee' means a person by whom the wealth tax or any other sum of money is payable under the provisions of the Wealth Tax Act, and includes the legal representative, executor or administrator of a deceased person and a person deemed to be an agent of a non-resident.