Navigating Tax Changes: NRIs and 'Liable to Tax

TAX ON NON-RESIDENT INDIANS -NEW DIMENSIONS OF ‘LIABLE TO TAX’

The Finance Bill, 2021, has introduced a clause (29A) in section-2 of the Income Tax Act, 1961, defining “liable to tax” as under:

“(29A) “liable to tax”, in relation to a person, means that there is a liability of tax on such person under any law for the time being in force in any country, and shall include a case where subsequent to imposition of tax liability, an exemption has been provided.”

Finally, in the Finance Act, 2021 the same has been changed as under:

(29A) “liable to tax”, in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of  that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country.

This change has wide ramifications for every individual being a citizen of India who either resides in those Countries where there is no income-tax liability or stateless Individuals for tax purposes, hereafter called as ‘Covered NRI’ and the impact of this change is called as ‘change in law’.

So let us understand some key ramifications:

Q 1: Why is this little change talked world over?

A:  As per the recent amendment in the definition of Resident for income tax purposes under the Income Tax Act whereby a deeming fiction has been created for an individual being a citizen of India to be a deemed resident not ordinary resident (RNOR) for income tax purposes where he satisfy all the following conditions:

• Having Indian source income which is more than 15 lakh in the previous year;
• He is not liable to tax in any other Country…..

So, by virtue of the above, all the above individuals being a citizen of India becomes deemed resident in India even without staying a single day in India and thereby liable to tax in India as RNOR which means all the benefits being extended to them as non-resident done away with and taxed for all their Indian sources income at normal tax rate applicable to Indian resident without any concessional tax rate and tax credit otherwise available to them as Non-resident.

Q 2: Exactly who are those individuals and is there any benefit under tax treaties?

A: Let us take a case study where Mr. X, an Indian citizen who is residing in UAE, where currently no income tax is payable, for last 10 years and his having deep economic interest and investments in India as his parents and other family members are staying in India. He is having the INR 5 Lakh under each following heads of Income in India and outside India in the previous year 2021-2022:

• Dividend Income in India
• Dividend Income in UAE
• Rent from Property in India
• Rent on property in UAE
• Short Term Capital Gain on Indian Shares
• Short Term Capital Gain on Mutual fund in India
• Interest income in UAE
• Interest on FCNR Account in India
• Interest on NRE account in India
• Salary Income in UAE

Situation I: Where Mr. X is residing in UAE for 183 days or more

In this situation the tax treaty between India and UAE will invoke where by residential status of Mr. X shall be governed by Article 4 of the treaty so he shall be determined to be resident of one Country either UAE or India and taxed accordingly. Therefore in this situation there will be no impact of the new provision. So said ‘change in law’ has no impact in genuine cases if ‘covered NRIs’ are from treaty Countries.

Situation II: Where Mr. X is residing in UAE for less than 183 days and say 30 days in India

In this situation, the impact of above ‘change in law’ will impact the taxability of Mr. X and he shall be deemed to be RNOR in India. The above said 10 source of income shall be taxed as under:

• No UAE sources income shall not be liable to tax in India.
• Interest on NRE and FCNR accounts shall be remain exempted in India
• All Indian source income shall be taxable similar to ordinary residents without any incentives otherwise available to NRI.

Q 3: Is India moving towards citizenship based taxation on income like USA?

A: NO, India most probably aims to collect more information from ‘Covered NRI’ who are having wide economic interest in India i.e. whose Indian source Income is more than 15 Lakh without taxing their foreign source income in India unlike USA. Moreover, India also aims to discourage treaty incentives to all those NRIs who are either tax resident of  Countries who are not charging Individual income tax and those who are state-less individual i.e. not tax resident of any jurisdiction.

Q 4: Why are covered NRIs so concerned from this provision?

A: There are so many misconceptions amongst NRIs that deeming tax residency read with newly inserted definition of “liable to tax’ by Finance Act 2021 w.e.f. 1.4.2021, one of them is that ‘Covered NRIs’ shall be liable to tax on all foreign sourced income if income tax is not payable in the source country or their worldwide income becomes taxable in India; there is no truth in this understanding.

Yes, their concerns are really genuine when they think they have to provide more information to the tax officers in India while assessing their Indian source income and obviously this deeming fiction is going to snatch away all tax incentives which otherwise available to a Non-resident in India.

Q 5: Is invocation of RNOR status for continuously more than 2 years as per the said ‘change in law’ will lead to ordinarily resident status of ‘covered NRI’ and thereby taxing worldwide income eventually as per S-6(6)(a) of ITA?

A: No, the ‘covered NRI’ shall not become ordinarily resident in India by virtue of invocation of RNOR status for continuously more than 2 years as per the said ‘change in law’. However, he may be carrying the risk of becoming ordinarily resident in India straight in the year in which he for the first time comply residency condition as stated in S-6(1) of ITA.

Q 6: What is the way forward for ‘covered NRIs as off now?

A: The following might be the thinking of ‘covered NRIs:

• Manage the Indian sourced income to Rs. 15 lakh or less in all the previous years
• Taking citizenship of some tax friendly Countries.
• Wait and watch for a year or so as some definite change can be expected from government.
• Accept it as it is and plan their affairs around it, as there is always many legal ways to tax planning.
• The author strongly support the 3rd and 4th options as off now.

Only time will tell what will be other ramifications of this ‘change in law’, but the intentions of the Government is very loud and clear to achieve transparency in tax laws in India.

Disclaimer:  The views in this Article are the personal views of the author. D S R V AND CO LLP would not be responsible for any action taken based on this, without any consultation.

Authored By:

CA Sanjay Kumar Agrawal

Email: sanjay@dsrvindia.com

M: +91 9810116321