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Taxation of Non-Resident Indians

By gkkedia Dt. June 13th, 2020

Finance Minister Nirmala Sitharaman on February 01, 2020 introduced the Finance Bill 2020
(‘Bill’)wherein changes regarding Taxation of Non-Residents was addressed. Since, it created mayhem
therefore it was expected that Bill will be passed after making some key changes in the original proposal.

Therefore, this write-up covers the three core areas:

  • Residential Status under the Income Tax Act before February 01, 2020
  • Amendments in law as initially announced in the Finance Bill, 2020
  • Concern expressed by NRIs
  • Final amendments in law as passed by the Lok Sabha on March 23, 2020 (effective from April 01, 2020)
  • Conclusion

 
Residential Status under the Income Tax Act prior to February 01, 2020

In the law existing before February 01, 2020 a person or an Indian citizen or a person of Indian Origin visiting India was considered to be an Indian resident, if he stayed in India for 182 days or more during the financial year.

Instances were noted where the relaxation of 182 days were being misused by individuals, considerable economic activities were executed by them from India while remaining a non-resident in perpetuity and in that way they were not obliged to affirm their global income in India.

Budget Memorandum also mentioned, individuals were organizing their affairs in all possible manners through which he does not become liable to tax in any country or jurisdiction during a year. High net worth individuals (HNWI) usually used to employ the arrangements to avoid payment of taxes to any jurisdiction/ country on income earned.

It was also referred to the definition of ‘Not Ordinarily Resident’. As per the law, following individuals shall be considered as ‘Not Ordinarily Resident’

  • who has been non-resident in nine out of the ten previous years preceding that year, or
  • who during the seven previous years preceding that year had been in India for a complete period of 729 days or less

 
Amendments in law as initially announced in the Finance Bill, 2020

With reference to the description above, the Finance Bill 2020 in relation to taxation of income of non-residents,

Proposed the following three important amendments to Section 6 of the Income Tax Act, effective from FY 2020-21:

  • Time limit for computing the residential status of a Citizen of India/Person of Indian origin, who is on a visit to India has been reduced from 182 days to 120 days.
  • An Individual, who is a citizen of India and not liable to tax in any other country, shall be deemed to be Resident in India
  • Conditions to qualify as ‘Not Ordinarily Resident’ in India the assessee needs to be a nonresident in India in 7 out of 10 years as against and the earlier second condition regarding the number of days shall stand omitted.

 
Concern expressed by NRIs
After the presentation made on Union Budget on February 01, 2020, there was a public outcry by NRIs regarding the deemed residency proposal. Residents of countries like UAE voiced their concerns because in their home country they were not required to pay any tax.

The Finance Ministry was quick to respond and issued a clarificatory CBDT Circular. The Finance Minister calmed the public outcry by assuring that the intention of the amendment was to tax the income earned abroad, only if it was out of businesses controlled from India.

Final amendments in law as passed by the Lok Sabha on March 23, 2020 (effective from 01 April, 2020
The Finance Bill 2020, introduced on February 01, 2020 was passed by the Lok Sabha on March 23, 2020 by Finance Minister Nirmala Sitharaman with certain key changes regarding Taxation of Non-Residents made as under:

  • Clarification on Deemed Residency in India:
  • The deeming provision of residency in India, as planned in the original Bill, intend to apply in case of an individual, being a Citizen of India, only if his total income, ‘Other than Income from Foreign Sources’*, exceeds Rs. 15 lakhs.

  • Moderation in the 120 days Rule:
  • The final amendment bill approved on March 23,2020 provides that in case of an Indian Citizen or a Person of Indian Origin the condition of residency with the reduced period of 120 days of stay in India, as compared to the earlier 182 days, shall apply only if his total income ‘Other than Income from Foreign Sources’* exceeds Rs. 15 lakhs.

    *An Explanation to Sec. 6 has been added to define the term ‘Income from Foreign Sources’ to mean income which accrues or arises outside India, except income derived from a business controlled in or a profession set up in India.

  • Returning to the previous rule for ‘Not Ordinarily Resident’:
  • Amendment as initially announced under the Finance Bill 2020 has been abandoned. The amended Bill returned to the earlier definition of ‘Not Ordinarily Resident’. Also, amended provision has also been further extended to include such individuals not covered by the aforesaid relaxation of 182 days and its application in case of individuals treated as deemed residents.

Conclusion
The effect of the amendments to the Finance Bill 2020 can be briefly analyzed as under:

  • Where the Rs. 15 lakhs limit applies, the previous 182 days rule shall determine the residential status of NRIs visiting India in all cases and where the limit exceeds Rs. 15 lakhs, 120 days rule shall determine the residential status.
  • Where the Rs. 15 lakhs limit is exceeded and where the individual stayed in India for 120 days or more but less than 182 days, he shall be treated as ‘Not Ordinarily Resident’.
  • In this case, the income which accrues or arises outside India from a business controlled in or a profession set up in India shall be liable to tax Indian Income but the other income earned income outside India shall not be liable to be taxed in India,
  • Citizen of India who is deemed to be resident in India, by virtue of his total income other than income from foreign sources exceeding Rs. 15 lakhs, such an individual shall be considered as ‘Not Ordinarily Resident’. Finance Minister has clarified in this respect that the intention of the amendment was to tax income from abroad only if it is earned out of businesses controlled from India stands effectively fulfilled.

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