Satya Sontanam/Anand KalyanaramanThe recent Budget set the cat among the non-resident pigeons by tightening the norms on residency provisions for individual assesses. The intent behind these changes, the Budget Memorandum says, is to prevent tax abuse. There are three key changes. One, to qualify as a non-resident (NR), certain categories of persons will have to be out of India for a longer period (about 240 days); earlier the time limit was about 180 days. Two, the norms for a person to qualify as a resident but not ordinarily resident (NOR) have been changed. Three, an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.
The third change, in particular, caused a fair bit of panic among several non-resident Indians (NRIs). Understandable, because the implication was that tax-free incomes earned by NRIs abroad (say, in the UAE) could now be brought under the Indian tax net.
Thankfully, the Finance Minister clarified with alacrity that the incomes of bona fide NRI workers in tax-free countries will not be taxed in India. This calmed many nerves.
But other concerns remain, especially regarding the change in the number of days for certain categories of persons to qualify as an NR.
Let’s ‘follow the money’ to understand why the proposed changes are making non-residents jittery. NRs and NORs enjoy tax advantages over residents. In the case of residents, all their incomes accrued/received in India as well as abroad are taxed in India.
In the case of NRs and NORs, what is taxed in India are largely only incomes that are accrued/received in India (see table).
Also, reporting and compliance requirements are tougher for residents. For instance, residents have to report in their tax returns, their foreign assets and income earned from such assets. So, it is beneficial to be categorised as an NR/NOR rather than as a resident under Indian tax laws.
The Budget proposals can make it harder for some persons to be categorised as NRs/NORs.
The Budget Memorandum says that liberal residency norms have resulted in instances of tax evasion. It says that individuals who are actually carrying out substantial economic activities from India, manage their period of stay in India so as to remain a non-resident in perpetuity and not be required to declare their global income in India.
To curb this, the Budget has sought to change the residency norms. That said, a close reading of the proposed changes suggests that they do not impact everyone; in some cases, the rules, in fact, seem to have been relaxed a bit. To explain why, we decode the complex provisions regarding residency status in the Income Tax Act, the proposed changes in Budget 2020 and their implications.
As it stands
A comma, it is said, can change everything. In tax legalese, the words ‘and’ & ‘or’ can also have such game-changing power. Section 6 of the I-T Act lays down the rules to determine residency status in India. A person who is not a resident in India in a financial year becomes an NR.
An individual is considered ‘resident’ in India in a financial year if she satisfies either of the following two basic conditions. The first condition is that she stays in India for at least 182 days (about six months) in a financial year. The second condition is that she stays in India for at least 60 days (about two months) in a financial year and for at least a total of 365 days in the four years preceding the financial year.
Here’s an example. Say, during FY20 (that is, between April 1, 2019, and March 31, 2020), Arya, an Indian citizen, left India for the first time on August 1, 2019, to visit her relatives abroad, and plans to return only in April 2020.
So, Arya is in India for 123 days in FY20 (from April 1, 2019, to August 1, 2019). She will be considered a resident in India for FY20.
That’s because she meets the second basic condition — she has stayed in India for at least 60 days in FY20, and for at least 365 days during the preceding four years (during FY16 to FY19). It does not matter that she did not meet the first basic condition of staying at least 182 days in India in FY20.
Now, if you thought that was complicated, wait, there’s more.
In the above second basic condition, the period of stay in India is relaxed from ‘at least 60 days in the financial year’ to ‘at least 182 days in the financial year’ under two circumstances. One, when an Indian citizen leaves the country for employment outside India or as a member of the crew of an Indian ship. Two, when an Indian citizen or a person of Indian origin (PIO) comes on a visit to India. (A PIO is essentially a person with Indian roots).
The benefit of this relaxation is that such persons become ‘residents’ only if they stay in India for a longer period (at least 182 days instead of at least 60 days) in the financial year.
For instance, in the above example, if Arya left India for taking up employment abroad on August 1, 2019, she will not be considered a resident in India for FY20. That’s because her stay in India (123 days) is less than 182 days in the year. So, she is an NR in FY20.
Let’s consider another example of Salman, a PIO settled in Australia, who visits India for five months (about 150 days) in every financial year to look after his family. In FY20, too, he visited for five months. Despite his total stay (about 600 days) in India during the four preceding financial years — FY16 to FY19 — being more than 365 days, Salman will still not be considered a resident since he stayed for less than 182 days in FY20. So, he is an NR in FY20.
What this means
Note that the first basic condition (>=182 days in India in a year) to qualify as a resident has not changed.
But from FY21, as per the changed second basic condition, an Indian citizen or PIO visiting India will be considered a resident if:
a) She stays in India for at least 120 days (about four months), as against the current time limit of at least 182 days (about six months), and
b.) Her stay in India in the preceding four financial years is at least 365 days.
Thus, Salman in the above example, will be considered a resident from FY21 onwards if he continues to visit India for five months every year, like in the earlier years. That’s because he would have stayed in India for at least 120 days in the financial year, and also at least 365 days in the preceding four financial years. If Salman does not want to be categorised as resident, he will have to restrict his stay in India to less than 120 days (about four months) instead of the current limit of less than 182 days (about six months).
Note that the proposed change in the Budget does not impact Arya in both the examples given above. That’s because the Budget provision is applicable only to Indian citizens or PIOs visiting India, and not to those leaving India for any purpose including vacation or employment.
In effect, the change will impact one category of persons and not everyone.
Not Ordinarily Resident (NOR)
As it stands
Thank God, and the taxman, for small mercies. Once a person is categorised as a resident, there is still some leeway given to her to escape the wide tax net — that is, offering only Indian income (and not all global income) to tax. This benefit is available if a person qualifies as a Not Ordinarily Resident (NOR). If she doesn’t qualify as an NOR, the resident becomes resident-and-ordinarily resident (ROR) who is subject to tax on her entire income, Indian and global.
An individual is considered a NOR in a financial year if she satisfies either of the following two conditions. One, if she is a non-resident in India in nine out of the 10 previous years preceding that year. Two, if she has been in India for a maximum of 729 days during the seven years preceding that financial year.
Say, Reema, employed outside India for the past many years, visits her family in India every year for short visits of about 30 days. But in FY20, she stayed in India for almost seven months (nearly 210 days) due to an emergency. As per the basic conditions for the residency test, Reema is a ‘resident’ in FY20 as she stayed for at least 182 days in India in the year.
But Reema can still be NOR if she a) has been a non-resident in nine out the preceding 10 years — during FY10 to FY19,or b) has stayed in India for less than 730 days in the preceding seven years — during FY13 to FY19.
Even if she is a non-resident in only eight out of the preceding 10 years and thus does not satisfy the first condition, she can still be an NOR if she meets the second condition of being in India for less than 730 days in the preceding seven years. Given that Reema has earlier been visiting for only about 30 days in a year (so, about 210 days in the seven preceding years), she would meet the second condition and qualify as an NOR.
What this means
The Budget Memorandum says that the two conditions currently for an individual to be an NOR have been the subject matter of disputes and amendments. So, the Budget has proposed to replace them with a single condition.
The shorter time period (seven years instead of nine years as NR) to qualify as an NOR could benefit foreign expatriates coming to India for employment, and also Indian citizens returning to India permanently. But the removal of the 729-day condition takes away a useful flexibility.
In Reema’s example above, if she stays in India in FY21 for a period long enough to make her a resident, she can still qualify as an NOR if she has been an NR in seven out of the preceding 10 years (FY14 to FY20).
As it stands
Currently, the residential status of an individual in India is determined only on the basis of the period of stay in India. But the Centre is worried about the avoidance of tax by ‘stateless persons’ — those who do not qualify as residents or domiciled in any country/tax jurisdiction.
The Budget Memorandum says: “It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWIs) to avoid paying taxes to any country/jurisdiction on income they earn.
“The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizens, to not be liable for tax anywhere in the world. Such a circumstance is certainly not desirable.”
So, the Budget has provisions for bringing into the tax net, incomes of such Indian citizen ‘stateless persons’.
What this means
The implication of this key change is that such Indian citizens will be deemed residents in India and liable to pay tax in India.
But this change could also have had an unintended consequence of bringing into the Indian tax net the incomes earned abroad by bona fide NRI workers in countries that don’t levy an income tax.
For instance, it could impact NRIs staying in countries such as the UAE that do not impose income tax on individuals under local tax laws. This had raised worries among many NRIs who work in such countries.
Thankfully, the Finance Ministry quickly clarified that the new provision is not intended to include in the tax net Indian citizens who are bona fide workers in other countries.
It clarified that in case of an Indian citizen who becomes a deemed resident of India under this proposed provision, income earned outside India by her shall not be taxed in India unless it is derived from an Indian business or profession. In short, bona fide NRIs working in countries that don’t levy income tax need not worry about these incomes being taxed in India. However, we need to wait for the Finance Act to be passed to understand the details of this provision regarding the “income derived from an Indian business or profession”.
Currently, income accrued outside India from a business or profession controlled from India is not taxed for non-residents. This could change from FY21.
Original Source: https://epaper.thehindubusinessline.com