There are over 28 million non-resident Indians (NRIs) settled outside India primarily concentrated in the US, UK, UAE, Saudi Arabia, Canada, Singapore, Hong Kong and other countries.
Authored by Suresh Surana
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There are over 28 million non-resident Indians (NRIs) settled outside India primarily concentrated in the US, UK, UAE, Saudi Arabia, Canada, Singapore, Hong Kong and other countries. The NRIs have always played an enormous role in India’s growth and economic progress due to investments in India and remittances made to India.
Residential Status Crucial to NRIs
Residential status is ascertained for each financial year (1 April to 31 March) separately. Residents are liable to tax on their worldwide income whereas non-residents are liable to tax only on income that accrues or is received in India. Hence, this is crucial for NRIs.
Lower Threshold of 120 days Continues for NRIs having Taxable Income of Rs 1.5 million
Generally speaking, NRIs can visit India and spend up to 181 days in a financial year while maintaining non-resident status for tax purposes. Last year, there were far reaching changes in provisions relating to determination of tax status in case of NRIs. One of the major changes was that in case of NRIs having taxable income in India of Rs. 1.5 million or more, the maximum permissible stay in India, in order to continue to maintain “non-resident status” for tax purposes, was reduced from 181 days to 119 days during the relevant financial year.
It was expected that 120 days would be relaxed to 182 days in Budget 2021 so as to not disincentivise NRIs from investing in India. However, this has not been considered. At the same time, NRIs covered by the reduced threshold would continue to have the status of “Resident but Not Ordinarily Resident” whereby, their income outside India would still not be subject to tax.
Deemed Resident Status for Indian Citizens
Another major change was that an Indian citizen having Indian taxable income exceeding Rs. 1.5 million during the relevant financial year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
This had resulted in apprehension for Indian citizens having employment or business interests or residing outside India, including in countries which presently do not levy any tax. As a welcome relief to such NRIs, it was clarified that “in case a person becomes Resident under this Section 6(1A), no tax will be levied on foreign income unless it is derived from an Indian business or profession”. Also, the same was incorporated in the IT Act, that such person would be treated as Resident and Not Ordinarily Resident and income outside India would not be liable to tax (only overseas businesses controlled from India shall be taxable in such case).
Meaning of “Liable to Tax” – Budget Provision Re-ignites Uncertainty
Earlier, the term “liable to tax” was not defined under the IT Act nor in the DTAAs. Now, Budget 2021 defines this in relation to a person “means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to the imposition of such tax liability, an exemption has been provided”. It seems the intention was to cover certain foreign pension funds availing exemption under tax laws of their home countries; however, Budget 2021 has also covered Section 6 related to the determination of the residential status of NRIs which appears to be unintended.
A person resident in any country may not be liable to tax, but nevertheless is a resident of that country which has the “right to tax” such persons by virtue of their residential status.
The Supreme Court in the case of Azadi Bachao Andolan's case (263 ITR 706) had clarified that 'liable to tax' connotes that a person is subject to one of the taxes mentioned in Article 2 in a Contracting State and it is immaterial whether the person actually pays the tax or not. This verdict has been followed in several Tribunal verdicts.
India has entered into double tax avoidance agreement (‘DTAA’) with almost 95 countries including Qatar, Oman, Saudi Arabia, etc. The term ‘Resident of a Contracting State’ is generally defined to mean any person who, under the laws of that State, is liable to taxes in that State by reason of his domicile, residence, place of management or any other criterion of a similar nature.
Under India UAE DTAA Protocol, an individual who is present in the UAE for a period/s totaling in the aggregate at least 183 days in a calendar year, will be considered as Resident of UAE for purpose of India UAE DTAA. There is no mention of “liable to tax”. As per section 90 of the IT Act, in the case of a non-resident, it would be governed by either provision of the Indian tax laws or the DTAA entered into between India and the resident country, whichever is more beneficial.
Exclusion of Lockdown Period for Computing Stay in India
Due to the lockdowns this financial year and the resultant international travel restrictions, several non-residents were stuck in India. Clarification or amendment was expected for the exclusion of such stay in India for determining the residential status as was done by CBDT for FY 2019-20, and it was mentioned that for FY 2020-21, the relief would be separately announced.
However, no such amendment or notification has been issued and non-residents will have to wait for some more time in this respect.
Suresh Surana is Founder at RSM India. Views are personal