Budget 2020: NRIs not paying tax in other countries will be taxed in India

The Union Budget 2021 may have put a smile on the faces of some taxpayers by introducing a new tax regime. But, for non-resident Indians (NRIs), the Budget comes bearing bad news.

“An Indian citizen who is not liable to tax in any other country or territory will be deemed to be a resident in India,” says Chartered Accountant Suresh Surana, founder — RSM India.

This means if an Indian citizen is not a resident of any country, they will now be deemed an Indian resident and their income will be taxed here.

Nand Kishore, partner, DSK Legal, says “Section 6 of the Income Tax Act, 1961, which defines the residence of a taxpayer in India for the purpose of tax has been amended to include an overriding provision. It says that if an individual, being a citizen of India, is not liable to tax in any other country or territory because of their domicile or residence or any other criteria of similar nature, then the said individual shall be deemed to be a resident of India.”

For instance, if you are an NRI staying in the UK, you are not domiciled there and hence exempted from tax in that country. And, if you divided your time between India and the UK, staying in India for only a small period of time, you were not taxed here either. Now, this will change.

Why this move

Chartered Accountant Ashok Shah, founding partner, NA Shah Associates, says “presently, if a person who is a Citizen of India or a Person of Indian Origin, managed his stay in India such that he remained a non-resident in perpetuity, he was not liable to pay tax on his global income in India. It was entirely possible for high net worth individuals to arrange his affairs in such a fashion that he would not be liable to tax in any other country and also not in India.” Thus going forward, all the income of the said individual, both domestic and global income would be taxed in India. Shah says “this will adversely impact High Networth Individuals using the domicile mechanism to evade tax globally.”

What’s the impact

Surana says “this would affect such persons who have been travelling across the world for business reasons and maintaining their non-resident status in all the countries in which they travel. From now onwards, they would be deemed to a resident of India and would be subject to taxation on their global income in India.”

“For residents of the UAE and other zero-tax countries, this may not have an impact but litigation in terms of ‘liable to tax’ and ‘not paying income tax’ will once again crop up. A suitable clarification from the government will avoid undue hardships.”

What you should do

Shah says “NRIs, who are citizens of India now should choose a country with beneficial/minimum tax rates for being assessed to tax, so as to avoid attracting the above deeming provision.”

Taxing Times

You have to spend at least 240 days out of India to be considered an NRI from 182 earlier

Even with the NRI status, you still have to pay tax in India if you’re not taxed in a foreign country

This amendment will take effect from April 1, 2020, (Assessment Year 2021-22)