Taxability of Rights Entitlements Under India–Saudi Arabia DTAA

 

Ever sold those little rights vouchers on your demat account and wondered if India’s taxman will come knocking? I feel you—nothing kills the post-trade high like a surprise tax notice. But here’s the good news: if you’re a Saudi resident, the India–Saudi Arabia DTAA has your back on rights entitlements. Let’s unpack this over a virtual cup of chai (or gahwa, if you prefer).

What Are Rights Entitlements, Anyway?

Think of rights entitlements as discount coupons for existing shareholders. When a company—say Bharti Airtel—offers you the chance to buy more shares at a bargain, they credit your demat with these rights. You can either:

• Use them to buy new shares
• Sell them on the market

Simple enough, but here’s where things get spicy: rights entitlements are not the same as the actual shares you already hold. They’re a separate security with their own ISIN code, trading window, and even a different Securities Transaction Tax (STT) rate. Neat, right?

The Big ITAT Mumbai Showdown

Picture this: a Saudi government body (the General Organization for Social Insurance) sells rights entitlements in Bharti Airtel and pockets a cool ₹3.82 crore. They claim, “Hey India, we’re Saudi residents—go tax this in Saudi Arabia!” The Indian tax department shoots back, “No way, this is income from an Indian company, so tax it here!”

Cue the Income Tax Appellate Tribunal in Mumbai. The tribunal had to answer one key question:
Are rights entitlements “shares” under the DTAA, or something else entirely?

Spoiler alert: They sided with the Saudi body, and here’s why.

Article 13 Breakdown: Shares vs. “Other Property”

The DTAA’s Article 13 treats capital gains like a tiered cake:

1. Paragraphs 4–5 cover gains from actual shares. India can tax those.
2. Paragraph 6 covers gains from “any property” not in the earlier sections—and says only the resident country can tax these.

Since rights entitlements aren’t literal shares, they don’t fall under paragraphs 4–5. Instead, para 6 kicks in, making Saudi Arabia the sole taxing jurisdiction. 🎉

Why Rights Entitlements Aren’t Shares

Here’s the beauty of the tribunal’s logic:

• Separate ISIN: SEBI gives rights entitlements their own code, just like options or warrants.
• Distinct STT: Rights carry an STT of 0.05% under “options in securities,” unlike shares.
• Statutory Definition: Under the Companies Act, a rights issue is an “offer” to subscribe—transferable, renounceable, and quite different from holding voting shares.

In plain English: you can’t lump rights entitlements in with your shareholding and call it the same thing. They’re their own beast.

Real-World Win for Saudi Investors

So what does that mean if you’re chilling in Riyadh and trading Indian paper?

• Zero Tax in India on rights entitlements gains—article 13(6) says so.
• No Saudi Capital Gains Tax either, since Saudi Arabia doesn’t tax capital gains.

That’s a tidy double win. Cha-ching! 💰

Why This Matters Beyond Saudi Arabia

This isn’t just some one-off quirky judgment. The same logic applies to any DTAA with a similar Article 13 structure—think India–Ireland, India–UAE, you name it. Investors trading global rights, warrants, or other non-share securities can breathe easier knowing treaties respect legal form over economic substance.

Tips to Claim Your DTAA Benefits Smoothly

1. Get your Tax Residency Certificate from Saudi authorities.
2. Submit Form 10F to your Indian broker or withholding agent.
3. Keep your trades clean—separate your share sales from your rights entitlements sales in your records.

A little paperwork upfront saves a mountain of stress later!

Final Thoughts

Tax treaties can feel like endless fine print, but this Mumbai ITAT ruling shows they work if you know how to use them. Rights entitlements aren’t shares, treaties treat them as “other property,” and Saudi investors get to enjoy capital gains tax exemption in India. It’s a textbook example of how smart treaty planning pays off—literally.

Next time you see those juicy rights vouchers pop up in your demat, remember: they’re not shares, they’re your golden ticket to tax-efficient gains. 😉