Budget 2020: Govt proposes income tax on non-taxpaying NRIs

By CNBC-TV18

The budget has turned out to be taxing for the non-resident Indian. Firstly, to be categorised a non-resident, an Indian now has to stay abroad for 240 days a year, against 182 previously. In other words, an Indian national, to claim the non-resident status, can’t stay in India for 120 days or more in a year.

“We've made changes in Income Tax Act where if an Indian citizen stays out of the country for more than 182 days, he becomes non-resident,” said revenue secretary Ajay Bhushan Pandey.  “Now in order to become non-resident, he has to stay out of the country for 240 days.”

The second rule is more deadly: a non-resident Indian, who is not taxed in the foreign country, will become taxable in India. The government said it is introducing this provision to prevent tax abuse.

Parizad Sirwalla,  partner and head, Global Mobility Services- Tax, KPMG in India said these are significant changes proposed in determining tax residency of individuals. "Indian citizens and person of Indian origin who were on a visit to India had an extended period of 182 days of stay in India before they could be regarded as a resident of India from an income tax perspective.  This period has been proposed to be reduced to 120 days now."

That apart, he 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.

This amendment could potentially impact many Indians who may be working/ staying in countries with no tax system, according to Sirwalla.  But he said there is ambiguity in the interpretation of the term “liable to be tax”, which may require some further clarifications from the government.

The government explained the rationale behind the proposal.

"Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year is being misused. 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.

Therefore, the government said it decided that the exception it provided for visiting India in a year be reduced to 120 days.  It also decided "an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India".

An individual or a HUF shall be "not ordinarily resident" in India in a previous year if the individual or the manager of the HUF has been a non-resident in India in seven out of 10 previous years preceding that year.

Tax experts say it was entirely possible for high net worth individuals to arrange the stay in India and abroad in such a manner that they would not pay tax anywhere and nor in India.

Gopal Bohra, Partner, NA Shah Associates, on the new proposed tax residency amendments said, "Currently, if a person who is a Citizen of India or a Person of Indian Origin, managed his stay in India such that he remained a non-resident in perpetuity, he was not liable to pay tax on his global income in India. It was entirely possible for high net worth individuals to arrange his affairs in such a fashion that he would not be liable to be taxed in any other country and also not in India."

“If any Indian citizen is not a resident of any country in the world, he'll be deemed to be a resident of India and his worldwide income will be taxed,” said Pandey.

Experts said now a person who is "resident of no country" — or doesn't pay tax — and is abroad for more than 240 days just to maintain the NRI status, will be considered a resident of India and his income will be taxed.

"It's a very big disadvantage for Indians residing overseas only to save on tax,"  said Dinesh Kanabar of Dhruva Advisors. He expects that many Indians stay abroad in countries, where the income tax is low or nil such as Dubai. Now they will be taxed in India if they are in the income tax bracket.

Parizad Sirwalla, Partner and Head, Global Mobility Services- Tax, KPMG in India said, "This amendment could potentially impact many Indians who may be working or staying in countries with no tax system. It is also believed that there is ambiguity in the interpretation of the term “liable to be a tax” which may require some further clarifications from the Government."

For Indians, finance minister Nirmala Sitharaman revised income tax rates and proposed new tax slabs.

The new income tax rates will, however, not allow exemptions under Section 80C. Home loan exemption, insurance exemptions, the standard deduction will also not stay under the regime.

"The new tax regime will be optional and the taxpayers will be given the choice to either remain in the old regime with exemptions and deductions or opt for the new reduced tax rate without those exemptions," Sitharaman said while unveiling Budget.

(With agency inputs).