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Budget 2020 the day after: NRIs' bona fide foreign income won't be taxed

The government said the provision was an “anti-abuse” one and will only apply to income that is generated locally.

ET Bureau|
Last Updated: Feb 03, 2020, 06.54 AM IST
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NEW DELHI: The government said it doesn’t intend to tax income that bona fide workers earn overseas, allaying concerns about a budget proposal relating to non-resident Indians (NRIs) that said those who weren’t taxed in another country were liable to pay tax in India. This had caused Indians working in the Middle East to panic as many countries in the region don’t levy income tax.

The government said the provision was an “anti-abuse” one and will only apply to income that is generated locally.

“It is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession,” the Central Board of Direct Taxes (CBDT) said in a statement on Sunday. “The new provision is not intended to include in tax net those Indian citizens who are bona fide workers in other countries.”

The measure is aimed at those who shift their stay to low-tax or no-tax countries to avoid paying taxes in India, the apex tax body said. The government has also lowered the threshold for being deemed a resident of the country to 120 days from 180 days in a year for Indian citizens or persons of Indian origin. The proposal aims to tighten residency provisions.

‘No Impact on Genuine NRIs’
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This is “an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas”, said revenue secretary Ajay Bhushan Pandey.

Finance minister Nirmala Sitharaman elaborated on Sunday.

“What we are doing now is that the income of an NRI generated in India will be taxed here,” she told reporters. “If he’s earning something in a jurisdiction where there is no tax, why will I include that into mine that has been generated there?” She said Indian earnings of NRIs such as rental income from property in the country is what’s intended to be taxed by the new provision.

“If you have a property here and you have rent out of it, but because you are living there, you carry this rent into your income there and pay no tax there, pay no tax here... since the property is in India, I have got a sovereign right to tax,” she said at a post-budget press conference. “I am not taxing what you’re earning in Dubai but that property which is giving you rent here, you may be an NRI, you may be living there but that is revenue being generated here for you. So, that’s the issue.”

Tax experts said this makes clear that genuine NRIs will not be impacted by the provision.

“With this clarification, it is clear that new residency provisions are applicable only for NRIs arranging their affairs for tax avoidance and will not impact bona fide workers/employees,” said Shailesh Kumar, director, Nangia Andersen Consulting. “It has also been clarified that even in such cases, only income from Indian business or profession of such ‘stateless Indian citizens’ will be taxed and not global income.”

Some questions
However, some experts questioned the clarification.

“Even though the clarification through the press release is welcome and reflects some quick action on the part of the government, it does not seem to be in line with the provisions in the proposed Bill and the existing provisions in the income tax Act,” said Amit Maheshwari, partner Ashok Maheshwary & Associates LLP. “The press release ends with a statement that if required, necessary clarification would be bought in the relevant provisions. I think that’s definitely required. Also, Indian incomes of NRIs were always taxable, so it will be seen what this amendment will achieve after this clarification.”

Kerala chief minister Pinarayi Vijayan said the residency requirements would hurt people of the state who work in the Middle East. He said there should be a distinction between those who exploit the NRI laws to evade tax and those professionals who work in the Gulf, travel and spend time in Kerala for addressing domestic responsibilities.

Pointing out that remittances account for one-third of Kerala’s annual income, Kerala finance minister Thomas Isaac told ET, “If the government gives tax concessions to exporters for earning foreign exchange, the government should know that the NRIs too bring home foreign exchange and that they play a critical role in neutralising the trade gap.”

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