Non-resident Indians not paying taxes in any foreign country will now be taxed in India, the Union Budget for 2020-21 has proposed.
At present, if an Indian 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. The Union Budget 2020 has now proposed to introduce a deeming provision that every Indian citizen, who is not liable to tax in any other country, by virtue of his domicile or residence, shall be deemed as a resident of India. Consequently, his global income would be taxable in India.
The government later clarified that the proposed tax on NRIs, will not apply on bonafide Indians working in tax-free foreign countries and is intended to tax only those seeking to escape tax by exploiting their non-resident status.
Finance minister Nirmala Sitharaman in her Budget for 2020-21 had proposed to tax non-resident Indians (NRIs) who do not pay taxes in any foreign country.
This provision raised anxiety in minds of those working in the Gulf region, where countries do not tax income earned by individuals. First, Sitharaman clarified that only Indian income of NRIs is proposed to be taxed under the new provision and later, the tax department issued a statement to say that ‘the new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries’.
Sitharaman said Indian earnings of NRIs, such as rental income from property in the country, is what was intended to be taxed by way of the new provision. “Whereas if you have a property here and you have rent out of it but, because you are living there, you carry this rent into your income there and pay no tax there, pay no tax here … since the property is in India, I have got a sovereign right to tax,” she said in a post-budget interaction.
“I am not taxing what you’re earning in Dubai but that property which is giving you rent here, you may be an NRI, you may be living there but that is revenue being generated here for you. So, that’s the issue,” she added.
Budget 2020 tweaks definition of ‘non-resident’
The Union Budget for 2020-21, presented on February 1, 2020, had tightened the screws on those seeking to escape tax by exploiting their non-resident status. While earlier it was possible to be classified as a non-resident by staying out of the country for 183 days or about six months in a year, this has now been, in effect, enhanced to 245 days.
The Budget also proposed to rework the definition of ‘not ordinarily resident’ in India, if the individual has been a non-resident in India in seven out of 10 previous years preceding that year. Earlier, for an individual to be considered ‘not ordinarily resident’, he/she had to be a non-resident in India in nine out of 10 years.
Transaction Square founder Girish Vanvari said, “These changes in definition would deter people from coming to India and some can even think of giving up Indian citizenship.” Gopal Bohra of NA Shah Associates said at present, it is entirely possible for high net-worth individuals to arrange his affairs in such a fashion that he would not be liable to tax in any other country and also not in India. The new provision ‘will adversely impact HNIs using the domicile mechanism to evade tax globally’, he said.