Non-resident Indians in the Arabian Gulf heaved a sigh of relief after India’s top taxation authority clarified that it does not intend to impose tax on income earned by genuine NRIs in their host countries.
The Central Board of Direct Taxes (CBDT) had stated that Indians who do not pay tax abroad would be taxed in India, creating confusion and panic among NRIs as many Gulf countries do not levy tax on income.
CBDT announced that; in case of an Indian citizen who becomes deemed resident inIndia, income earned outside India by him/her shall not be taxed in India unless it is derived from an Indian business or profession.
The new provision was meant for those who park their money in low-tax or no-tax territories to avoid paying taxes in India.
There are many Indians who acquire NRI status in a bid to evade tax on their unaccounted income in India.
With this in mind, the government has lowered the threshold for being deemed a resident of India to 120 days from 180 days in a year for Indian residents or individuals of Indian origin.
Anti-abuse provision
Taxation experts say that the new measure is an anti-abuse provision to plug loopholes in the system and not intended to tax income earned by Indians working abroad.
The original proposal was made by India’s finance minister, Nirmala Seetharaman, while presenting the general budget in February 2020.
Following a huge outcry by NRIs, she backtracked somewhat but introduced new provisions to bring NRIs who earn income in India in the tax net.
The finance ministry later stated that earnings by NRIs in India by way of rental income from property will be taxed under the new provision.
At a post-budget conference, Seetharaman said: “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.
“What we are doing now is that the income of an NRI generated in India will be taxed here. Indian earnings of NRIs resembling rental income from property in the nation is what’s meant to be taxed by the new provision.”
Benoy Sasi, international lawyer at DIFC Courts, commented: “NRIs will not be impacted by the new provision. It is now clear that new residency provisions are applicable only for NRIs arranging their affairs for tax avoidance and will not impact bona fide workers.
“Only income from Indian business or profession of such ‘stateless Indian citizens’ will be taxed and not global income.”
Digging up old cases
Meanwhile, NRIs became skeptical when the income-tax department suddenly asked several individuals to provide proof of their non-resident status for assessment years prior to 2019.
What prompted such enquiry was that the department received information about several individuals evading taxes on substantial offshore assets and earnings by falsely declaring themselves as NRIs.
The tax authorities issued notices to them under the Black Money Law saying that their tax returns for the period prior to 2019 will be re-opened if they fail to prove NRI status.
The liability to pay tax in India depends on the residential status and not on the nationality or domicile status of taxpayer.
Under the residency rule, a person who stays 184 days or more abroad to take up employment or carry out business can avoid tax on overseas earnings for that year by claiming to be non-resident.
But, if a person spends 184 days or more abroad on a personal visit on the assessment year, he or she would be considered a non-resident only if he/she has spent less than 365 in India during the previous four years.
