Definition of NRIs changed
Source: By Gireesh Chandra Prasad: Mint
A change in the definition of tax residence proposed in the budget could end up hitting Indians working abroad, including in countries like the UAE which levies no income tax; unless a bilateral tax treaty bails them out.
The move signals a major shift in India’s tax policy toward the approach followed by the US, which taxes its citizens irrespective of their tax residence. The move could deal a blow to non-resident Indians (NRIs) working in countries in West Asia, expats who account for a major chunk of foreign remittances received by India.
Under the changes proposed in the budget, an Indian citizen who is not liable to be taxed in any other country or territory shall be deemed to be resident in India. Under current law, the worldwide income of an Indian resident is taxable in India. In the case of a non-resident Indian, only the income earned in India is taxable.
The way the amendment to the Act is worded suggests that NRIs working in countries with no income tax liability will have to pay the tax in India.
A government official explained that the proposed provision means NRIs working in West Asia will be treated as residents, giving India taxation rights. But, the official said, tax treaties with those countries will be key to deciding where they will actually be taxed.
“Tax treaties have tie-breaker provisions to decide which country gets taxation rights," said the official who spoke on condition of anonymity. Tie-breaker rules to decide residence status for taxation rights take into account factors such as the country in which the individual has his house, parents and ancestral home, explained Amit Maheshwari, partner, Ashok Maheshwary & Associates Llp. The proposal will mean NRIs who are resident in both the countries will have to invoke provisions in the tax treaties between the countries to get relief.
American citizens who work in foreign countries have the liability to file tax returns and pay taxes in the US—even if they are resident in the other country. The country where they reside offers credits for the taxes they pay in the US for their local tax obligations, as per bilateral tax treaty rules.
Several tax experts told there was an absence of clarity on how this provision will work. “It seems Indian citizens working in countries which do not tax them, may end up paying taxes in India," said Maheshwari. Some experts said that at times, such consequences in tax law changes are unintended and that more clarity was needed on the matter.
India retained its position as the world’s top recipient of remittances with its diaspora sending a whopping $79 billion back home in 2018 against $65 billion in the previous year, the World Bank’s Migration and Development Brief said last year. India had the largest number of migrants living abroad (17.5 million), followed by Mexico and China (11.8 million and 10.7 million respectively).
The proposed amendment will take effect from 1 April 2021, said the memorandum explaining budget proposals. To be sure the proposals have to pass both houses of parliament to take effect. However, members of parliament (MPs) can suggest amendments.
The proposal is part of the larger effort to target high net worth individuals who keep moving around countries in such a way that they do not get caught in the domicile rules of any country and thus avoid paying their fair share of tax in any country. The Narendra Modi administration is keen to widen its tax base by bringing more people into the tax net to find resources for its welfare spending.
According to Daksha Baxi, head of international taxation at Cyril Amarchand Mangaldas, an Indian citizen who is not taxed elsewhere in the world for whatever reason and also not taxed in India because of not being present in the country for more than 120 days, will now be taxed in India. “This will hit those who have moved out of India to tax havens but not yet got their foreign citizenship."
