Whether a Seafarer who is a citizen of India and who does not pay tax anywhere will be taxed in India by virtue of the provision explained below?

Budget 2020 has added the following provision in section 6 of Income Tax Act, 1961 that,

An individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

Within just one day of the introduction of the above provision in the budget, the government had to come out with a press release on 2nd February 2020 stating that

“The Finance Bill, 2020 has 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. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India.

Seafarer reduction day in Budget 2020

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

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”

Interpretation

The seafarers are being appointed by Recruitment and Placement License (RPSL) companies. It is as per the instruction and the direction of RPSL companies and as per the vacancies in the ship that the seafarers are being appointed on-board. The RPSL companies and shipowners have authority and control over the placement of the seafarers. Therefore, there is no possibility at all for the seafarers to shift their stay in low or no tax jurisdiction to avoid payment of tax in India since there is no planning from seafarers’ side to plot him on a particular ship so as to avoid tax.

The seafarers are bonafide workers on-board a ship. They are appointed by RPSL companies according to the vacancies available and allotted a specific rank based on the experience they gather on-board a ship. The ship moves from one territorial waters to another. Hence the nature of job is such that they don’t have a desk job but work on a ship which keeps on moving from one territorial waters to another territorial waters.

The contract of seafarers with the shipowners and (RPSL) companies is for a period which may range from 3 months to 9 months. The duration of job of a seafarer is such that it ought to become a non-resident of India and also it does not become resident of any other country.

The new provision is an anti-abuse provision and is intended to tax only those seeking to escape tax by exploiting their non-resident status. Hence by virtue of such duration and the nature of job, they automatically become non-resident of India and also, they tend to not become a resident of any other country. Therefore, there cannot be any exploitation of non-resident status on the part of seafarer. 

Revenue Secretary Ajay Bhushan Pandey said in post budget interaction with media

“Indians working in Middle East as well as those in Merchant Navy shall not be taxed using the New Provision. Somebody who is a citizen of India and sitting in a tax haven and not paying taxes then he has to pay tax. By issuing clarification, we have kept them (workers in the Middle East) out. Same for merchant navy because their income is also not arising out of India. The new provision was brought in because people were taking advantage of the existing one. These are the anti-abuse provisions, and not to inconvenience any genuine persons”

Finance Minister Nirmala Sitharaman said in post budget interaction with media

“What we are doing now is that the income of an NRI generated in India will be taxed here. If he’s earning something in a jurisdiction where there is no tax, why will I include that into mine that has been generated there. Indian earnings of NRIs such as rental income from property in the country is what is intended to be taxed by way of the new provision. Whereas if you have a property here and you have rent out of it, but because you are living there, you carry this rent into your income there and pay no tax there, pay no tax here. Since the property is in India, I have got a sovereign right to tax in India. 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. So, that’s the issue.”

Hence as per my view the new deeming provision for residency shall not apply to the seafarers working in Merchant Navy.

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Sachet V. Agarwal is associate member of Institute of Chartered Accountants of India (ICAI). He has experience in areas such as audit of Companies (Private and Public), Limited Liability Partnership (LLP), Unregistered Partnership firm, trusts, educational institutions, information systems, banks an View Full Profile

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5 Comments

  1. Manzoor Ahmed Bakhshi says:

    Rental income of property of a nonresident indian is taxable in India under the existing provisions and finance Minister is ill advised to amend law to tax the same.

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