Incomes of bonafide NRI workers in tax-free countries will not be taxed in India

The Finance Ministry has issued a clarification that clears the air over a contentious anti-tax abuse Budget proposal that had raised the hackles of many non-resident Indians. As per the proposal, “an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India”. The implication was that such a person may become liable to pay tax in India. This key change could also have had the unintended consequence of bringing into the Indian tax net the incomes earned abroad by bonafide NRI workers in countries that don’t levy income tax. For instance, it could impact NRIs staying in countries such as UAE which do not impose income tax on individuals under local tax laws. This had raised worries among many NRIs who work in such jurisdictions.

Thankfully, the Finance Ministry has now clarified that the new provision is not intended to include in the tax net those Indian citizens who are bonafide workers in other countries. It clarifies that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Making its intent clear, the clarification says, “In some section of the media, the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in 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 adds that necessary clarification, if required, shall be incorporated in the relevant provision of the law.

In short, bonafide NRIs working in countries that don’t levy income tax need not worry about these incomes being taxed in India. Shailesh Kumar, Director, Nangia Andersen Consulting says, “The clarification issued by Government on tax residency status of Indian citizens not liable to tax in any other country, is a welcome move and giving much relief to NRIs working in tax free countries like UAE or other similar countries, who were worried about their tax status. With this clarification, it is clear that new residency provisions are applicable only for NRIs arranging their affairs for tax avoidance and will not impact bonafide workers/ employees. It has also been clarified that even in such cases, only income from Indian business or profession of such 'stateless Indian citizens' will be taxed and not global income.”

Other concerns

One worry may have been eased, but others remain. To prevent tax abuse by non-residents, the Budget has also proposed that to qualify as non-resident, a person should now be effectively out of India for a longer period (about 240 days); earlier the time limit was shorter (about 180 days). Besides, the Budget has proposed that, now, a person will be Not-Ordinarily Resident (NOR) if he has been a non-resident in India in seven out of ten previous years preceding that year; the rules were more liberal earlier.

NRIs and NORs enjoy tax advantages compared with residents. In the case of residents, all their incomes (earned in India and also abroad) are taxed in India, while in the case of NRIs and NORs, what is taxed in India is largely only incomes earned and/or accrued in India. The Budget Memorandum says that liberal residency norms have resulted in instances of misuse to evade tax. It says that 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. To curb this, the Budget has sought to change the residency norms.

But some experts worry that these changes could adversely impact even bonafide NRIs. Shefali Goradia, Partner, Deloitte India, says, “Reducing the threshold of physical presence (in India) to 120 days in a year will make visiting NRIs more conscious of their travel dates. On one hand, the Government has been keen to attract talent and onshore the funds and fund managers, whereas on the other hand, this move will disincentivize people from spending more time in India. Businesses are mobile and with a view to attract entrepreneurs to India, the Finance Minister should consider restoring the prior threshold.”