Barring confusion over the NRI status definition and tax on their global income, non-resident Indians (NRIs) expressed a mixed feeling at the budget proposals presented early this week, though they had big hopes on tax incentives and relaxed baggage rules. Nothing of that sort happened, except for some minor changes in the income tax slabs, which affect them remotely.
But what shocked the NRIs and the general public alike was the confusion caused by finance minister Nirmala Sitharaman’s initial statement that NRIs’ global income will be taxed and the NRI status will be redefined. She increased the number of days a person must be away from the India to qualify as an ‘NRI’ from 182 to 240.
Consequently she reduced the number of days a citizen should stay in the country to 120 from 182 for qualifying as a resident who is liable to pay tax in India.
That had panicked some NRIs who work in countries that do not levy income tax, such as the UAE.
Here is the clarification by the Central Board of Direct Taxes (CBDT) on the new provision pertaining to residence in India:
“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. 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 those countries will be taxed in India on the income that they have earned there. The interpretation is not correct.
“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 India business or profession.”
Finance minister clarifies
Further clarifications came from the finance minister herself when she said NRIs working in income tax-free jurisdictions such as the UAE will have to pay tax only on their income generated in India, and not on their earnings outside the country.
Though most NRIs are not in the Indian tax net, many of them are required to pay tax on the incomes they earn in India by way of rent on housing and commercial property, dividend income, short and long term capital gains on equity and property sales professional service charges.
A provision in the Finance Bill 2020 stipulated that an Indian citizen who is not liable to be taxed in any other country or territory shall be deemed a resident of India. This has caused worries that NRIs working in countries that do not tax personal income would be taxed in India on their global earnings, similar to how residents are taxed on their global income. They are required to pay 30% tax plus cess and surcharge on NRIs’ income abroad.
“Though it created confusion and outrage by NRIs, the clarification has calmed them, though the fact remains that NRIs who cannot prove his residency of one particular country and is not a tax resident of one particular country will be assumed to be a tax resident of India and his worldwide Income will be taxed in India,” said Benoy Sasi, international lawyer at DIFC Courts, Dubai.
NRIs in UAE relieved
NRIs in the UAE will not be covered by the new provision as they are resident of the UAE under the India-UAE Double Taxation Avoidance Agreement (DTAA). As per the current Income Tax Act, if an Indian citizen stays out of the country for more than 182 days, he becomes non-resident. It is now changed that in order to become a non-resident, he/she has to stay out of the country for 240 days. The only condition is that the NRI has to furnish a tax residency certificate to the income tax authorities.
“The new proposal is that any Indian staying in India for 120 days or more will be considered as a resident, meaning he will lose his NRI status, and taxed. If the NRI status is lost, his or her global income also becomes taxable in India. Low-paid workers usually visit India after long intervals and stay back for more than six months, thus losing their NRI status. A few of them earn income from property rentals or investments and they will be liable to pay tax in India,” said Sajith Kumar PK, CEO and MD, IBMC Financial Professionals Group, Dubai.
Dividend distribution tax
Investors received a relief in the form of relaxation in the provision of dividend tax. The budget proposed to levy TDS (tax deducted at source) at 10% on dividend income paid by a company or mutual fund to shareholders if amount exceeds INR5,000 ($70; £54; €63.77) a year. Mutual fund income over INR5,000 will be subject to 10% TDS on dividend payment only and that no tax will be deducted on income on capital gains.
The budget also proposed to remove Dividend Distribution Tax (DDT) at the level of company or mutual fund and proposed to tax the same in the hands of share or unit holder. The tax authority, CBDT, clarified that no TDS will be cut if income was in nature of capital gains.
TDS on mutual funds was applicable for only NRI investors. Also, only dividend income worth over INR100,000 ($1,404; £1,080; €1,272) concerning mutual funds was taxed at 10%.
At present, investors have to pay 10% income tax on dividends exceeding INR 1 million ($14,030; £10,784; €12,756) per annum by way of Dividend Distribution Tax. NRIs demand abolition of this tax as the tax is levied at multiple levels. Dividend Distribution Tax (DDT) is the tax levied on dividends distributed by the companies from its profits, though this profit gets already taxed before dividend distribution.
“Now that this provision is removed, it will result in high investments in profit-making companies and higher distribution of dividends,” said Benoy Sasi.