Budget 2020: Govt clarifies NRIs taxation is only anti-abuse provision, doesn’t impact bonafide NRI workers

However, an Indian citizen who is not tax resident of any country will be deemed to be resident in India

Kumar Shankar Roy Feb 1, 2020

Updated (February 2, 2020 7.30 PM): Finance ministry has on Sunday issued a press note clarifying the NRI taxation provision in the Budget 2020 which had created a flutter among NRIs living particularly in Gulf countries. 

The Finance Bill 2020 had proposed that an Indian citizen shall be deemed to be resident in India if he is not liable to be taxed in any country or jurisdiction. The note said “this is an anti-abuse provision since it’s noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India”.

According to the note, the new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. 

The note added: In some sections 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 pay tax in these countries will be taxed in India on the income that they have earned there. “This interpretation is not correct,” the statement said.

So this note clarifies the sensitive issue of taxing NRI workers’ income in India if they are living in a zero tax jurisdiction. 

However, if an Indian citizen is not a tax resident of any country then he will be deemed to be tax resident in India. This provision has been brought in as an anti-abuse measure to check avoidance of paying taxes.

These changes take effect from 1st April, 2021 and will, accordingly, apply from assessment year 2021-22 onwards.

NRI status

Besides, the Budget 2020 has also made a change in the number of days one NRI needs to be outside of India to be considered as a Non resident Indian. In effect, to be an NRI now, you will have to be outside India for at least 245 days, about two months more compared to the earlier norm of 182 days.

These changes also take effect from 1st April, 2021 and from assessment year 2021-22 onwards.

An Indian citizen or a person of Indian origin is considered Indian resident if he/she is in India for 182 days in a year year. This provision provides relaxation to an Indian citizen or a person of Indian origin allowing them to visit India for longer duration without becoming resident of India.

However, the government said that 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, the government said.

Tax residence

The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his/her affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world.

“In the light of above, it is proposed that- (i) the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting India in that year be decreased to 120 days from existing 182 days. (ii) an individual or an HUF shall be said to 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 ten previous years preceding that year. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6. (iii) an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India,” said a budget document.

Meanwhile, the government has fully opened certain specified categories of Government securities (G-Secs) for non-resident investors. This will allow NRIs to invest in these categories of Government securities.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].