Budget 2020: NRIs To Be Taxed Only For Income Generated In India

The Union Finance Minister while reading out the Budget 2020 document, proposed to tax the Non-Resident Indians (NRIs) who do not pay any taxes in the foreign country on Saturday. It is supposed to majorly affect the Indians who reside in countries like United Arab Emirates, Oman, and Bahrain with zero income taxes.

The Budget documents stated that an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be a resident of India.

"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," the memorandum that is part of the budget documents stated.

"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 HNWI and other individuals, who may be an Indian citizen to not to be liable for tax anywhere in the world," it added.

Anti-Abuse Provision

The ministry said it was an "anti-abuse provision" amid the growing incidents of NRIs shifting their stay in low or no-tax jurisdiction to evade tax in India.

However, the Finance Minister clarified on Sunday, that the NRIs working in income-tax-free countries will have to pay tax only on their income generated in India, and not on their earnings outside the country.

In simpler terms, NRIs would be liable to pay tax only on income derived from business or profession in India.

"What we are saying is this: for the income generated in India, pay a tax. If you have a property here that generates rental income, but because you live there, you carry this income there and pay tax neither there nor here,'' FM Sitharaman said in a press briefing on Sunday.

She added that the clarification will be included in the statute to clear any confusion among tax officials.

Bonafide Workers, Not Included

The new provision is not intended to include those Indian citizens in the taxation structure, who are bonafide workers in other countries.

"In some section of the media, the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including 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," read the release.

Adding to that narrative, the Central Board of Direct Taxes (CBDT) also put out a clarification on Sunday saying, "the new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries.''

Change in Residency Provisions

To fall under the category of a non-resident, an Indian now has to stay abroad for 240 days a year, against 182 previously. In other words, an Indian national, to claim the non-resident status, can't stay in India for 120 days or more in a year.

It is believed that the Indian citizens who do not stay in India but have significant economic activities in India would now find it difficult to evade taxes.

"We've made changes in Income Tax Act where if an Indian citizen stays out of the country for more than 182 days, he becomes non-resident," said revenue secretary Ajay Bhushan Pandey. "Now in order to become non-resident, he has to stay out of the country for 240 days."

"Hence, the non-residents are being cornered from two different sides wherein being stateless would lead to them becoming resident in India. Hence, to qualify as a non-resident, they would have to ensure that they remain tax resident of any other country and they should be out of India for at least 246 days," he pointed out, adding that residents who don't pay taxes in other countries will be taxed in India.

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