The union budget was presented by the Finance Minister under the leadership of Prime Minister Narendra Modi Led NDA government on 1st February 2020, reaffirming the aim of India becoming a 5 trillion dollar economy by 2025.
Considering the tax collection from NRIs, and the improper means employed by some High Networth Individuals, evading taxes by avoiding being resident of any country, budget 2020 has laid the foundation to tax NRIs who are not liable to pay taxes anywhere. In other words, even if they are not citizens.
A couple of alarmist news articles scared the NRI community, especially those being from the UAE. There is a big difference between being a Non-Resident Indian (NRI) in the UAE and being an NRI in any other part of the world. The difference lies in the matter of citizenship. Unlike in counties like the USA, UK, Australia or Singapore, where staying for a particular period of time gives you citizenship, with no prospect of citizenship, NRIs in UAE are certain to return to India post-retirement.
It was misunderstood to include NRIs in the Gulf countries who don’t get citizenship as per the rules of those countries. It was wrongly assumed that NRIs will have to pay taxes in India on foreign income just because there is no direct tax in the UAE. The income tax department promptly came out with a clarification, saying “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/her 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. “The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries.”
The budget document mentioned that it was possible for an individual to arrange his/her affairs in a manner where he/she is not liable to tax in any country or jurisdiction during the year. This issue bothers a vast majority of countries around the world. The issue becomes critical to tax authorities across the world especially in the light of the fact that governments around the world are engaged in signing double tax avoidance treaties.
Indians who are able to evade tax by planning their travel across multiple countries would be impacted by the proposed amendment. Such NRIs would not be able to escape taxation anywhere in the world now.
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. Consequently, anyone who stays in India for 120 days or more in a financial year will now be deemed as a resident liable to pay tax. The earlier threshold was 182 days. The whole agenda is to tighten the noose around people evading taxes by being outside India for a short period claiming NRI benefits. It is therefore very important for bonafide NRIs to be careful while making India travel plans keeping track of this limit to retain their NRI status.
This amendment will come in force from the FY 2020-21.
At Groworth we were quick to issue the clarification that bonafide workers living in countries where there is no taxation system will not face any impact of this amendment.
Lets now discuss important details of the Budget, from the NRIs perspective:
Definition of Resident and Non-Resident:
Number of days increased from earlier 182 days now to 240 days, an individual who stays outside India for more than 240 days cumulative in the preceding year becomes a Non-Resident Indian.
2. Resident but Not Ordinary Resident:
The earlier conditions were:
If you have been an NRI in 9 out of 10 financial years preceding the year.
OR
You have during the 7 financial years preceding the year
been in India for a period of 729 days or less.
Now it has been changed to only one condition, which reads as:
“If you have been an NRI in 7 out of 10 financial years preceding the year”.
RNOR status is beneficial for those NRIs who plan on going back to India for good. Only their Indian income remains taxable in such cases while the foreign income remains tax-free for the next 2 financial years.
3. Removal of Dividend Distribution Tax (DDT)
The Clamour for removal of DDT had been on for a while due to the cascading taxation it caused. India was levying total of 20.56 percent DDT on a companies declaring dividends. This is over and above the corporate tax that companies pay on their taxable profit. The decision is likely to benefit small as well as non-resident taxpayers. Also, doing away with this tax can give a major push to investments.
Under the present scenario, domestic companies are required to pay DDT on dividends distributed to the investors and such dividend is exempt in the hands of investors under Section 10(34) of the Act. However, if such dividend income exceeds Rs. 10 Lakhs, then the receiver is required to pay tax at the rate of 10% on such dividend income. Under the proposed amendment, such Dividend will no longer be brought to tax under DDT, it will be taxed in the hands of the receiver as per their applicable tax rate instead. However, if the receiver has incurred any interest expense in order to earn such dividend, then the deduction of interest will be allowed as deduction u/s 57 of the Act subject to a limit of 20% of the Dividend earned. Further, company distributing dividend will now be required to deduct TDS at the rate of 10% if such dividend payment exceeds Rs. 5000/-
4. Changes in Tax Rate Slabs:
The Income-tax slab rates applicable under the new tax regime would be:
| Total Income (Rs.) | Simplied Income Tax Rate |
|---|---|
| Up to Rs 2.5 Lakhs | Nil |
| Rs 2,50,001 to 5,00,000 | 5% |
| Rs 5,00,001 to 7,50,001 | 10% |
| Rs 7,50,0001 to 10,00,000 | 15% |
| Rs 10,00,001 to 12,50,000 | 20% |
| Rs 12, 50,001 to 15,00,000 | 25% |
| Above Rs 15,00,000 | 30% |
The new slab rates are optional and you need to forego deductions to avail the benefit. Individuals who would prefer to have deductions claimed can opt for the old scheme instead. Cess and surcharge on income tax payable in the new proposed personal tax regime remain the same as in the existing tax regime. The slab rates benefits are available to Non-Resident Indians while the income up to Rs 2.50 Lacs will be exempt for all including super and super senior citizens.
5. Gifts from Non Relatives:
A Non-Resident Indian receiving gifts from Non-Blood Relative exceeding Rs 50,000 in a financial year will now be considered taxable as part of his/her total income. The relevance can be understood by a simple example: Say one of your friends loaned from you AEDs for shopping while in Dubai, and he/she returns it back to you in India, the moment he/she returns you the amount in India, it becomes a part of your income owing to the fact that this transaction is not going to be settled in the future, it is already done.
The changes being made are in an endeavor to make the rules friendlier and the compliance easy.
Disclaimer: The contents of the document are solely for information purposes. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited. For more, please connect at ajay@nriexclusive.com