Finance minister Nirmala Sitharaman has proposed in Union Budget 2020 to crack down on persons who dodge taxes by exploiting their non-resident status in India.
If an Indian or a person of Indian origin managed to stay in the country as a non-resident, he need not pay tax on income earned in other countries. The government felt there was a loophole here that people were making the most of by dividing — managing — their time between India and overseas to avoid being categorised as tax residents of the country.
The proposal has expectedly caused great consternation among non-resident Indians (NRIs). Here is an attempt to explain the proposal.
First, here is a summary of the proposed changes:
1. Under current laws — that is until March 2020 — a person could maintain the NRI status by spending 182 days outside India. But from April 2020, an individual would be required to stay out of India for 245 days to be considered an NRI.
2. An Indian citizen who is not liable to pay tax in any other country or territory shall be deemed to be resident in India.
3. A person shall be called “not ordinarily resident” in a previous year if the person has been a non-resident in India in 7 out of the 10 previous years preceding that year. Earlier, a person was a “not ordinarily resident” — only the taxman can come up with these terms — in a previous year if he was a non-resident in India in nine out of the 10 previous years OR has been in India for 729 or less days in the past seven years.
What do these changes mean for a taxpayer?
Daksha Baxi, head, International Taxation, Cyril Amarchand Mangaldas, on tax amendments for NRIs, said this means that those who actually have their businesses in India and stay in India for more than 120 days while they are resident elsewhere would now become resident in India. NRIs now have to live outside India for more than 245 days to be able to remain out of the Indian tax net, Baxi told
Parizad Sirwalla, partner and head, Global Mobility Services - Tax, KPMG in India, said Indian citizens will always be regarded as residents of India irrespective of their stay in India in the relevant financial year if they are not liable to pay tax in any other country or territory on account of their residence, domicile, etc.
"...In many cases we have found that some people are residents of no country in the world, they may be staying a certain number of days in different parts of the world. So... any Indian citizen - if he is not a resident of any country in the world - would be deemed to be resident in India, and then his worldwide income will be taxed," Revenue secretary Ajay Bhushan Pandey said.
To implement the same, the budget has proposed to rework the definition of NRIs.
Who does it affect and how?
Dinesh Kanabar of Dhruva Advisors said the tax proposal is a very big disadvantage for Indians residing overseas only to save on tax.
Indian passport holders, who are residents in zero-tax jurisdictions such as United Arab Emirates, Bahamas, Oman, Bahrain, Qatar, Kuwait, Saudi Arabia etc., will potentially be subject to tax in India on their global income.
Given that these individuals will be treated as residents for Indian tax purposes, all their global income streams and holdings will be required to be disclosed in the respective income tax returns.
Kanabar said he expects many Indians to stay abroad in countries such as Dubai, where the income tax is low or nil. “Now they will be taxed in India if they are in the income tax bracket.”
Sirwalla of KPMG said the new tax proposal could potentially impact many Indians who may be working or staying in countries with no tax system.
Who it doesn't affect
The government has clarified that the new provision is not intended to tax those Indian citizens who are bonafide workers in other countries. "The new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct," it said in a circular.
The government said income earned by an Indian citizen who becomes a deemed resident of India under this proposed provision will not be taxed unless it is derived from an Indian business or profession.
What is the government’s rationale to change the law?
The government explained the rationale behind the proposal. People were misusing the prescribed period of stay in India to escape taxes.
“Individuals who are actually carrying out substantial economic activities from India manage their period of stay in India so as to remain a non-resident in perpetuity and not be required to declare their global income in India," it said.
The government said that the issue of the so-called stateless persons has been bothering the tax world for quite some time. "It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to be taxed in any country or jurisdiction in a year," it said.
Tax experts agreed. It was entirely possible for high net worth individuals to arrange their stay in India and abroad in such a manner that they would not pay tax anywhere, including in India.
What happens next?
The proposal, if implemented, could lead to historic opening up of proceedings to find out if the income streams created overseas were in line with Indian foreign exchange and other regulations effective at that point.With this, the Indian authorities are seeking to ensure that individuals maintaining NRI status without substantial economic activities outside the country will be denied the benefits of NRI status. Hence, it is important for NRIs to demonstrate a substantial economic activity outside of India "either in terms of an active or passive income stream which requires their presence outside of India."