NEW DELHI: The Finance Ministry on Sunday clarified that even if an NRI is deemed a resident of India under new provisions proposed in the Union Budget, such an individual will be taxed only on income earned in India or derived through an Indian business or profession.
The Finance Bill, 2020 had proposed that an Indian citizen shall be deemed to be a resident in India if he is not liable to be taxed in any country or jurisdiction. Consequently, such an individual's earnings would be taxed by Indian authorities.
Sunday's clarification, however, comes as a relief to millions of Indian workers in countries like the United Arab Emirates (UAE) who feared to have to shell out taxes in India on their overseas incomes too, since the UAE is a zero income tax nation.
"The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. 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 the 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," the finance ministry said.
"In order to avoid any misinterpretation, it is clarified 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. Necessary clarification, if required, shall be incorporated in the relevant provision of the law," the statement from the ministry added.
The Finance Minister had proposed in the Union Budget on Saturday measures to limit tax avoidance by individuals managing their overseas stays in such a way as to avoid tax.
The expanded tax obligations are proposed to be made through two major tweaks: one to the definition of NRIs and another on their tax obligations. First, Indian citizens will now have to stay a longer period outside India to be classified as NRIs. Currently, Indian citizens not resident in India for more than 182 days a year are classified as NRIs.
However, the government proposes to change this requirement. "Now in order to become non-resident, he/she has to stay out of the country for 240 days," pointed out revenue secretary Ajay Bhushan Pandey. In parallel, the Union Budget also proposes to extend income tax liabilities to any NRI who is not liable pay taxes in any other country during their stint outside India's borders.
If passed by the Parliament, these amendments are set to take effect from April 1, 2021, and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years, Budget fine print says.
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The government holds that these changes are necessary since NRI status is being misused to evade tax. "Instances have come to notice where the period of 182 days… 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 finance ministry said in the Budget memorandum.
"It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year," said Budget memo says.