Finance Act, 2020 has come up with some landmark amendments in the Income Tax Act, 1961 in relation to taxation of income for Non-resident Indians making it more difficult for such people to maintain their ‘Non-resident’ tag so as to keep their foreign income out of the Indian Income Tax applicability.
Indian citizens having a major chunk of their income from sources outside India have so far been managing their affairs in such a way that they maintain their ‘Non-resident’ status. We will have a look as to what has exactly impacted the Non-resident Indians as a result of this Finance Act, 2020.
WHAT IS THE EXACT CHANGE?
There were two amendments proposed in the Finance Bill 2020 which materially hit the Indian citizens living abroad.
1. As per proposed Bill, the first amendment limits the number of days which such Indians can spend on their visits to India. Initially, Indians living abroad would become a ‘resident’ in India only if they stay for a period of 182 days or more during a year. This ‘182 days or more’ has been reduced to ‘120 days or more’. So such Indians need to restrict their visits to India for a period not exceeding 119 days. Failing this, they will become a resident in India and the entire Income Tax Act will apply to them deeming them to be a resident in India.
However, while passing the bill, an amendment was brought about in the proposed bill by which the above change would apply only if such Non resident Indian citizen’s income from Indian sources would be Rs. 15,00,000/-or more in a financial year.
2. So far Indian citizens living abroad were never required to prove their ‘residence’ or ‘domicile’ in any country by way of a ‘Tax residency certificate’ unless they wanted to claim the benefit of DTAA. But from now, this finance bill has tapped those Indian citizens who are not a resident of any country in the world. Such Indian citizens would be made a deemed resident of India under this proposed amendment. Unless, an Indian citizen produces a valid ‘Tax residency certificate’ or domicile certificate of some country in the world, he will never enjoy the status of a ‘Non-resident’. Instead he will be considered as a ‘resident’ and the entire global income would be taxed and the Income Tax act will apply assuming that he is a resident. However, while passing the bill, an amendment was brought about in the proposed bill by which the above change would apply only if such Non resident Indian citizen’s income from Indian sources would be Rs. 15,00,000/-or more.
MISINTERPRETATION OF THE ABOVE AMENDMENT BY CERTAIN PORTION OF THE MEDIA
This provision of making certain Indian citizens a ‘deemed resident’ of India has been proposed in the act only with the intention to bring under the tax net those Indian citizens who had been traveling from country to country merely to maintain their NRI status and ended up being a ‘resident’ of no country.
Post the announcement of the above amendments, especially the provision proposed to make certain Indian citizens a ‘deemed resident’, there were widespread rumors in the media that Indian citizens living and working in the tax free gulf countries and paying no tax on the income earned there anywhere in the world would be made a deemed resident of India and hence would be taxed in India on the income earned abroad .
Here, we need to interpret the wording of the finance bill proposing this provision correctly.
Clause 1A of Sec 6 of the Income Tax act, 1961 which has been inserted vide this Finance Bill, 2020 ( as passed ) reads as under.
“Notwithstanding anything contained in clause (1), 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.”
The words marked in bold above are extremely important to interpret the amendment. It is true that Indian citizens living in the gulf countries are not liable to tax in any country or territory. However, the reason for the same is not their domicile or residence or any other criteria of similar nature. It is because these gulf countries as a whole do not have any provisions which bring tax on their earnings. ‘Ejusdem generis’ is an accepted rule of interpretation of law which states that where specific words are followed by words of general meaning, their meaning is to be derived with reference to the specific words preceding such general words. So any other criteria of similar nature can never include the reason of the country being a tax haven because of which they will be considered a deemed resident.
To conclude, only where Indian citizens are escaping tax around the world by making themselves non residents in many countries of the world, they will get trapped under this new Sub-clause (1A) to clause (b) of Section 6. Indian citizens living and working in the gulf are escaping tax around the world because there is no tax in the gulf and not because of their domicile or residence or any other criteria of similar nature. These amendments too will apply only in case their Income from Indian sources exceeds fifteen lakh rupees.
WHAT SHOULD NON RESIDENT INDIANS TAKE CARE POST 01ST APRIL, 2020 ?
To avoid losing the ‘Non-resident’ tag, Indian citizens having income from Indian sources exceeding Fifteen Lakh rupees living abroad must take the following actions.
1. Restrict their stay in India during the financial year to 119 days in any circumstances.
2. Get a domicile/tax residency certificate from the government of the country where they stay for the relevant period. They need to prove their domicile or residency in the country of their stay to maintain themselves as a ‘non- resident’.
3. To minimize your overall tax outflow worldwide, plan your residency accordingly.
WHICH CATEGORY OF PEOPLE NEED NOT BOTHER AT ALL ABOUT THESE AMENDMENTS?
It is important and worthwhile to note that all these amendments are relevant only for ‘INDIAN CITIZENS’. These amendments are not applicable to any person who is not a citizen of India. Therefore, the following category of people need not bother of this amendment.
1. People of Indian origin (either ex-citizens or merely by descent) who have given up their Indian citizenship and are a citizen of some other country
2. Foreign citizens (both of Indian origin as well as Non-Indian origin)
3. People who have no connection with India whatsoever.
4. Indian citizens whose income from Indian sources does not exceed Fifteen Lakh rupees.
Disclaimer: This article is based on the law prevailing status quo and is for general information only. Subscribers and readers should seek appropriate professional advice before acting on the basis of any information contained herein.