NRI definition changed to stop tax avoidance

Wednesday 05th February 2020 04:36 EST
 
 

The Indian Budget has tightened the screws on those seeking to escape tax by exploiting their non-resident status. While earlier it was possible to be classified as non-resident by staying out of the country for 183 days or about six months in a year, this has now been, in effect, enhanced to 245 days.

The change has been made because some taxpayers divided their time between India and overseas to avoid being categorised as tax residents in India. Once a tax resident is further classified as ordinarily resident (OR), he pays tax in India on his global income, which would include say interest income on overseas bank accounts.

As Parizad Sirwalla, partner and head, global mobility services (tax) at KPMG India points out, “Indian citizens and persons of Indian origin who were on visit to India had an extended period of 182 days of stay in India (as opposed to 60 days) before they could be regarded as a resident from an income tax perspective. This period is proposed to be reduced to 120 days now.”

As things stand, an individual is a resident in India for a particular financial year if he has been here for an overall period of 365 days or more within the four years preceding and an overall period of 60 days in that particular year. The 182-day relaxation was made available to Indian citizens and persons of Indian origin.

Individuals with major business in India misused relaxed duration

The Budget memorandum pointed out that this relaxed duration of 182 days was misused by individuals who had significant economic activity in India (say a business), managed their period of stay, so as to remain a non-resident in perpetuity. With such individuals now being required to stay out of the country for 245 days in a year, the misuse becomes more difficult for those having business interests in India.

Gautam Nayak, tax partner at CNK & Associates cautions, “NRIs or Overseas Citizens of India, visiting relatives in India need to now be more careful and limit their stays to less than 120 days in a year, or else they may also face tax on their worldwide income.”

After having determined an individual as a tax resident, there is a secondary test to determine whether the individual qualifies as a not ordinarily resident (NOR) or ordinarily resident (OR).

Currently there are complex rules to determine when a person is NOR. This has been simplified to say that a person is NOR for a particular financial year if he has been a non-resident in seven out of the ten preceding years.

This determination is critical as while an ‘NOR’ is only taxed on India income, an individual who is an ‘OR’ is taxable on his worldwide income.

Another change made is that an Indian citizen not ‘liable to tax’ in any other country or territory shall be deemed to be resident in India. At first glance, it appeared that India’s diaspora which works in Gulf countries (where there is no tax on individual income) would be badly hit. However, the Finance Bill added that this would be the case if the individual is not liable to tax in any other country by reason of his domicile, or residence or any other criteria of similar nature.

Tour packages, overseas remittances under tax net

According to the Budget documents, an authorised dealer receiving an amount or an aggregate of amounts of Rs 700,000 or more in a financial year for remittance out of India under the LRS of the Reserve Bank of India, will be liable to collect TCS, if he receives sum in excess of said amount from a buyer at the rate of five per cent.

Sellers of overseas tour packages will be liable to collect TCS at 5%. In a bid to widen and deepen the tax net, the government has proposed to amend Section 206C of the I-T Act to levy five per cent TCS (tax collected at source) on overseas remittances and for sale of overseas tour package.

According to the Budget documents, an authorised dealer receiving an amount or an aggregate of amounts of Rs 700,000 or more in a financial year for remittance out of India under the Liberalised remittances Schemes (LRS) of the Reserve Bank of India, will be liable to collect TCS, if he receives sum in excess of said amount from a buyer - a person remitting such amount out of India - at the rate of five per cent. In non PAN/Aadhaar cases, the rate will be ten per cent.

Similarly, a seller of an overseas tour programme package who receives any amount from any buyer - a person who purchases such package - will be liable to collect TCS at the rate of five per cent. The rate will be ten per cent in non-PAN and non-Aadhaar cases.

Overseas tour programme package is defined as any tour package which offers visit to a country or countries or territory or territories outside India, and includes expenses for travel or hotel stay or boarding or lodging or any other expense of similar nature, the Budget documents state.

Further, it has also proposed a new levy of TDS at the rate of one per cent to be paid by a e-commerce operator for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform.


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