After the Indian Budget 2020 was announced, many media outlets headlined that non-resident Indians (NRIs) would now have to pay taxes in India on their income in India and abroad. The personnel behind those headlines are probably quietly eating their words now, though some are still squirming and saying, “Yes, but…”
Adding to the confusing rhetoric on the budget and its implications for NRIs were scores of ‘arm-chair tax experts’ who shared their wisdom through tweets and posts that were then lapped up and promptly retweeted or posted by their ‘followers’ and ‘likers’ on social media platforms.
To do an airing-out of the issue, let us begin by seeing what the Indian Budget 2020 documents say: “The issue of stateless persons has been bothering the tax world for quite some time. 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 (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country.
“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; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.”
Yes, it is true that HNW Indians who were able to evade tax by planning their travel across multiple countries would now be impacted by the proposed amendment. Such dubious ‘Non-Resident Indians’ (NRIs) would not be able to completely escape taxation in India going forward.
Clarifying this further, Indian Finance Minister Nirmala Sitharaman said in a media interview: “The Finance Bill 2020 has proposed that an Indian citizen shall be deemed to be resident in India, if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low- or no-tax jurisdiction to avoid payment of tax in India.”
The minister emphasized, “The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some sections of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct.”
To avoid any misinterpretation, it was also 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.
According to tax experts, Indian citizens who do not stay in India but have significant economic activities in India would now find it difficult to escape paying taxes in India.
In a bid to tighten the residency provisions on HNWI, the Budget also proposed to reduce the period of stay in India to 120 days, from earlier 182 days, for a person to be categorised as non-resident Indians (NRI).
To cut through all these legalese and convoluted statements of tax pundits let us simply state:
If you are a ‘resident’ Indian, your global income is taxable in India. If you are a ‘non-resident’ Indian, your Indian income, whether it is earned or accrued, is taxable in India. However, income earned on your Non-Resident External (NRE) and Foreign Currency Non-Resident (FCNR) accounts are tax-free. Any questions?
So, whether you pay income tax in India boils down to your resident status. Are you a resident, or are you a non-resident? This brings up the question of who is a resident, who is an NRI?
For financial purposes, as per Indian Income Tax Act, you are considered an Indian resident for a financial year if: One, you are in India for at least 6 months (182 days to be exact) during the financial year. Two, if you are in India for 2 months (60 days) for the year in the previous year and have lived for one whole year (365 days) in the last four years.
If you are an Indian citizen working abroad, or a member of a crew on an Indian ship, only the first condition, and not the second, is available to you — if you spend at least 182 days in India, you are a resident. The same is applicable to a Person of Indian Origin (PIO) who is on a visit to India. PIO is a person whose parents, or any of his grandparents were born in undivided India.
You are an NRI if you do not meet any of the above conditions.
What the Budget 2020 is now proposing is, to amend the above mentioned Income Tax Act to change the period provision from the existing six months to four months (120 days). So you will be considered a resident of India, if you spend120 days in India. And, as an Indian resident, your global income will be taxable in India, if it is derived from an Indian business or profession. This income may have been earned or received outside, but it will be taxed in India. In case this income is also taxable in another country, you can take advantage of the Double Tax Avoidance Agreement (DTAA).
Meanwhile, for Indian income tax payers, the finance minister has provided major income tax cuts across most tax slabs. The income tax rate has been revised to 5 percent tax for income between Rs2.5-5 lakh; 10 percent tax for income between Rs5-7.5 lakh as against 20 percent; 15 percent tax for income between Rs7.5-10 lakh as against 20 percent; 20 percent tax for income between Rs10-12.5 lakh as against 30 percent; 25 percent tax for income between Rs12.5-15 lakh as against 30 percent; and 30 percent tax for income above Rs15 lakh. The budget also offers taxpayers the option to avail of the reduced tax rates and forego all tax exemptions, or to remain with the previous tax rate and continue to claim various tax exemptions.
Most taxpayers tend to look at the budget amendments in tax provisions through a narrow perspective of what impact it will have on their cash in hand and how to avoid paying taxes or getting the most excemptions. However, the government needs to consider the broader vision of improving living for all Indians with the tax money it collects. It has to focus on providing food, shelter, health, education, jobs, infrastructure, industry, defense and a whole host of other things that benefit all 1.3 billion Indians. This is no doubt, not easy, especially considering that only a miniscule percentage of the population pay taxes.
An analysis of tax data from the assessment year 2017-2018 shows the top 5 percent of individual taxpayers contribute over three-fifths of the total income tax collections. To put it in perspective, just 1.3 million people out of a total population of 1,300 million contribute 60 percent of the income tax the government receives each year. This is even further skewed when it comes to corporate tax, with the largest 5 percent of firms contributing more than 90 percent of total corporate tax collections.
We all revel in complaining about the potholes on Indian roads, the dilapidated state of everything in India, how our politicians are corrupt and never pay attention to our needs despite us paying taxes. Well, why would the politician bother with you the taxpayer, after all, only around 7 percent of total voters in the country pay any income tax. FYI: 70 percent of voters pay tax in the United States and 100 percent do so in Norway.
Read Today's News TODAY... on our Telegram Channel click here to join and receive all the latest updates t.me/thetimeskuwait
