Crackdown on NRIS who don't pay tax:

NRIS need to choose a country with beneficial/minimum tax rates

Union Budget 2021 might have put a smile on the faces of some taxpayers by introducing a new tax regime. But, for non-resident Indians (NRIS), the Budget comes bearing bad news.

“An Indian citizen who is not liable to tax in any other country or territory will be deemed to be a resident in India,” says chartered accountant Suresh Surana, founder — RSM India.

This means if an Indian is not a resident of any country, he will now be deemed an Indian resident and his income will be taxed here.

Nand Kishore, partner, DSK Legal, says “Section 6 of the Income Tax Act, 1961, which defines the residence of a taxpayer in India for the purpose of tax ,has been amended to include an overriding provision. It says that if an individual, being a citizen of India, is not liable to tax in any other country or territory because of their domicile or residence or any other criteria of similar nature, then the said individual shall be deemed to be a resident of India.”

For instance, if you are an Indian staying in the UK, you are not domiciled there and hence exempted from tax in that country. And, if you divided your time between India and the UK, staying in India for only a small period of time, you were not taxed here either. Now, this will change.

Why this move

Chartered accountant Ashok Shah, founding partner, NA Shah Associates, says “Presently, if a person who is a citizen of India or a Person of Indian Origin, managed his stay in India such that he remained a non-resident in perpetuity. He was not liable to pay tax on his global income in India. It was entirely possible for a high net worth individual to arrange their affairs in such a fashion that they would not be liable to pay tax in any other country and also not in India.” Thus going forward, all the income of the said individual, both domestic and global, would be taxed in India. Says Shah: “This will adversely impact High Networth Individuals using the domicile mechanism to evade tax globally.”

What’s the impact

Surana says “This would affect such persons who have been travelling across the world for business reasons and maintaining their non-resident status in all the countries in which they travel. From now, they would be deemed to be a resident of India and be subject to taxation on their global income in India.”

For residents of the UAE and other zero-tax countries, this may not have an impact but litigation in terms of ‘liable to tax’ and ‘not paying income tax’ will once again crop up. A suitable clarification from the government will avoid undue hardships.

What you should do

Shah says “NRIS, who are citizens of India now, should choose a country with beneficial/minimum tax rates for being assessed to tax, so as to avoid attracting the above deeming provision.”