- Date : 21/02/2020
- Read: 4 mins
The Union Budget proposal for amendment of tax laws to bring NRIs under the tax ambit can effect a sea change in NRI taxability.
One of the most prominent and publicised takeaways to come out of the Union Budget 2020 is that NRIs would need to pay tax if they don’t pay tax anywhere else. This has become a cause of concern for NRIs, particularly overseas workers. However, a later press release clarified the interpretation and intent of this decision.
The Budget document stated that the taxability of stateless persons has not been adequately addressed. As of now, a person could plan their travel and stay during the financial year in a manner that made it possible for them to avoid being taxed in any country. High net-worth individuals (HNWIs) in particular could use this strategy and save a fortune in taxes.
This was possible because of the provisions related to tax residence status, which classifies Indian citizens as residents, not ordinary residents, and non-residents. Accordingly, HNWIs and others could plan their overseas stay in a way that enabled them to slip out of the tax reach in all countries.
Related: Are you an NRI? Here’s how you can claim a TDS refund
Just as double taxation is being weeded out, the recent Budget also stressed the need for eliminating double non-taxation. If passed by Parliament, this amendment will come into effect from FY 2020-21.
A change in the definition of ‘not ordinary resident’ for an individual has been proposed, which will make NRIs 'ordinary residents' from 2020-21. Further, from FY 2024-25, they will become ordinarily resident. In effect, an NRI-turned-resident will have to report their foreign assets and may have to pay taxes on their global income while filing IT returns.
The Budget has also tightened residency provisions for tax purposes. Earlier, if an Indian citizen who stayed out of India for 182 days, they would become non-residents. The new law requires one to stay outside India for 240 days or more to be a non-resident
Indians will be assessed as residents irrespective of their stay in India or elsewhere in the relevant previous year in which they were not liable to pay tax in any other country or territory.
The term ‘liable to pay tax’ prompted further clarification from the government. As we saw, overseas workers living and earning in a country without any tax system could potentially become taxable in India. However, the government’s clarification in this regard categorically stated that Indians who are bona fide workers overseas in a country without any tax system will not be taxed in India.
The government clarification further highlighted that any income earned outside India by an Indian citizen will not be taxed unless it arises from an Indian business or profession.
Related: Budget 2020: Sector-wise allocations
To sum up, the amendment excludes Indian citizens who are bona fide workers in another country or territory. Instead, it is designed to be an anti-abuse provision that is expected to tax people who deliberately use their residential status to evade taxation altogether. It will also impose a tax burden on Indian citizens who change their residence to low- or no-tax countries for the purpose of avoiding tax.
Tax experts, however, continue to seek further clarity on the issue of taxation of NRIs. Some foresee the use of a ‘tiebreaker’ technique between two countries, one being India, to decide on the first right of imposing tax. The tiebreaker test can be used to settle the place of taxation of a person by two countries who have signed tax treaties.
Related: Key highlights of Budget 2020
On the topic of not taxing bona fide overseas workers, some experts have questioned the sanctity of the press release itself, as it is not legally binding. Others see the possibility of people surrendering their Indian citizenship in order to avoid being taxed. Overall, it still seems to be early days in terms of clarity on the nuances of the amendment.
Here's what Budget 2020 has in store for taxpayers?
One of the most prominent and publicised takeaways to come out of the Union Budget 2020 is that NRIs would need to pay tax if they don’t pay tax anywhere else. This has become a cause of concern for NRIs, particularly overseas workers. However, a later press release clarified the interpretation and intent of this decision.
The Budget document stated that the taxability of stateless persons has not been adequately addressed. As of now, a person could plan their travel and stay during the financial year in a manner that made it possible for them to avoid being taxed in any country. High net-worth individuals (HNWIs) in particular could use this strategy and save a fortune in taxes.
This was possible because of the provisions related to tax residence status, which classifies Indian citizens as residents, not ordinary residents, and non-residents. Accordingly, HNWIs and others could plan their overseas stay in a way that enabled them to slip out of the tax reach in all countries.
Related: Are you an NRI? Here’s how you can claim a TDS refund
Just as double taxation is being weeded out, the recent Budget also stressed the need for eliminating double non-taxation. If passed by Parliament, this amendment will come into effect from FY 2020-21.
A change in the definition of ‘not ordinary resident’ for an individual has been proposed, which will make NRIs 'ordinary residents' from 2020-21. Further, from FY 2024-25, they will become ordinarily resident. In effect, an NRI-turned-resident will have to report their foreign assets and may have to pay taxes on their global income while filing IT returns.
The Budget has also tightened residency provisions for tax purposes. Earlier, if an Indian citizen who stayed out of India for 182 days, they would become non-residents. The new law requires one to stay outside India for 240 days or more to be a non-resident
Indians will be assessed as residents irrespective of their stay in India or elsewhere in the relevant previous year in which they were not liable to pay tax in any other country or territory.
The term ‘liable to pay tax’ prompted further clarification from the government. As we saw, overseas workers living and earning in a country without any tax system could potentially become taxable in India. However, the government’s clarification in this regard categorically stated that Indians who are bona fide workers overseas in a country without any tax system will not be taxed in India.
The government clarification further highlighted that any income earned outside India by an Indian citizen will not be taxed unless it arises from an Indian business or profession.
Related: Budget 2020: Sector-wise allocations
To sum up, the amendment excludes Indian citizens who are bona fide workers in another country or territory. Instead, it is designed to be an anti-abuse provision that is expected to tax people who deliberately use their residential status to evade taxation altogether. It will also impose a tax burden on Indian citizens who change their residence to low- or no-tax countries for the purpose of avoiding tax.
Tax experts, however, continue to seek further clarity on the issue of taxation of NRIs. Some foresee the use of a ‘tiebreaker’ technique between two countries, one being India, to decide on the first right of imposing tax. The tiebreaker test can be used to settle the place of taxation of a person by two countries who have signed tax treaties.
Related: Key highlights of Budget 2020
On the topic of not taxing bona fide overseas workers, some experts have questioned the sanctity of the press release itself, as it is not legally binding. Others see the possibility of people surrendering their Indian citizenship in order to avoid being taxed. Overall, it still seems to be early days in terms of clarity on the nuances of the amendment.
Here's what Budget 2020 has in store for taxpayers?
