From: ss7k+@andrew.cmu.edu (Shvetank Shah)
Newsgroups: soc.culture.indian
Subject: Fwd: Tax Treaty Information
Date: 16 Oct 92 09:50:13 GMT
Article-I.D.: andrew.4erk3J600WB_9_J1Qg
Organization: Carnegie Mellon, Pittsburgh, PA


TAX TREATY POSES FILING DILEMMA FOR INDIAN STUDENTS*

(The following is based on information provided by Paula Singer, a
partner in the law firm of Vacovec, Mayotte & Singer in Newton,
Massachusetts, and a member of NAFSA' Ad Hoc Tax Committee.)

Although the United States Tax Treaty Convention with India was
originally signed in September 1989 and took effect in 1991, the
Internal Revenue Service (IRS) has yet to issue instructions or a
revenue ruling for claiming benefits under the treaty.  For Indian
students, the absence of such guidance has made it difficult to file a
timely return claiming the benefits provided in Article 21 of the
Treaty, "Payments Received by Students and Apprentices."  Last year
Indian students in the United States numbered approximately 29,000.

Specifically, Article 21 provides two benefits to any student who was a
resident of India immediately prior to visiting the United States for
the purpose of his/her education.  First, Paragraph 1 exempts from tax
"payments which arise outside of the United States for the purpose of
education, maintenance or training."  Second, under a new benefit unique
to Indian Students, a student is entitled during his/her education and
training "to the same exemptions, reliefs or reductions in respect of
taxes available to residents" of the United States "in respect of
grants, scholarhsips and remuneration from employment not covered by
Paragraph 1."

Thus Indian students can now claim resident exemptions for dependents
and the greater of a standardized deduction based on filing status or
itemized deductions.  In addition, Indian students can file using
married filing jointly status which has the lowest rates.  [With no
treaty benefits, a nonresident is limited to one exemption, certain
itemized deductions but not the standard deduction, and, if applicable,
the higher rates of married filing separately status.]

In terms of filing 1991 returns, many students filed for an extension to
August 17, 1992 hoping that a revenue ruling and/or instructions on the
Indian Treaty would become available.  Some of these same students filed
for another extension until October 15, 1992 citing the continued lack
of guidance as the reason.

Other students filed Form 1040, 1040A, or 1040EZ (resident tax forms)
for 1991 since these include instructions sufficient to compute the
exemptions available to residents (Form 1040NR for nonresidents does
not).  Although these individuals may have in fact calculated the
correct tax, it is likely that the IRS will require them to file Form
1040NR since the treaty does not change an individual's tax status from
nonresident to resident, but only changes the way the nonresident's
taxable income is computed.  Nonresidents who have incorrectly filed a
tax return as a resident should file an amended Form 1040X correcting
the return and the tax as necessary.  Moreover, it appears that the
IRS's computer system was not modified to take the Indian Treaty into
account, as some Indian students who managed to claim treaty benefits
using the Form 1040NR have received correction notices computing their
tax without the treaty benefits.

An IRS official in the Office of Chief Counsel has advised that Indian
students who have not yet filed, or who have been granted an extension
to October 15, should file the Form 1040NR for 1991, and file an amended
return, Form 1040X, to claim a refund after the revenue ruling and
instructions are issued.  Alternatively, assuming no instructions for
claiming benefits under the Indian tax treaty are forthcoming, students
may wish to use the following approach:  compute the tax using Form 1040
(for dependent exemptions, the standard deduction, and married filing
jointly rates where applicable), transfer the calculations to the
1040NR, and attach the 1040 to the 1040NR as a statement.  Indian
students should not compute taxes using such items as earned income tax
credit which is clearly beyond the scope of Article 21 of the Treaty. 
This method is consistent with the dual status tax return preparation
approach for departing aliens.  A copy of Article 21 of the Indian
Treaty should be attached to the complete return.  As an added
safeguard, the individual can write "Indian Treaty Benefit" on the face
of the return.

1.  This notice is posted on behalf of the Office of International
Education             (OIE).
2.  Please note that additional information is NOT available at OIE.
*3. Taken from Government Affairs Bulletin published by NAFSA: 
Association of   International Educators, Volume 8, Number 8.






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Shvetank Shah                                        Opinions, however
    Internet:  helix@CMU.EDU                         half-baked, are all
    Tax & Policy Economics Group                     mine ;-)
    Price Waterhouse                                                     
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