Budget 2020: Govt clarifies on new definition of NRI under Finance Bill 2020

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The government on February 2 issued a clarification on the proposed tax on Non-Resident Indians (NRIs), saying that the new provision is not intended to include those Indian citizens in the taxation net, who are bonafide workers in other countries.

In a press release, the government said 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 jurisdictions to avoid payment of tax in India.”

“The new provision is not intended to include in tax net those Indian citizens 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.

“In order to avoid any misinterpretation, 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. Necessary clarification, if required, shall be incorporated in the relevant provision of the law,” the statement added.

The Finance Bill, 2020, proposed that an Indian citizen shall be deemed to be a resident in India if he is not liable to be taxed in any country or jurisdiction.

The statement says that Finance Bill 2020 has introduced a sub-section (1A) in section 6 deeming an Indian citizen to be resident in India, if he is not liable to tax anywhere else.

The government also presented a number of scenarios:

Let us assume that there is an Indian citizen who stays in UAE. As per UAE law, if a person stays there for 183 days or more in a calendar year, he becomes resident of UAE. If under sub-section (1A) he also becomes resident in India, it becomes a case of tie breaker. The tie breaker rule is applied in accordance with the Article 4 of India UAE DTAA.

The first rule is where does this person has permanent home. If he has permanent home in UAE only, the tie breaker test is resolved in favour of him being resident of UAE.

If he has permanent home in both UAE and India we go to second test. Which is centre of vital interest being personal and economic relation. If a person is employed only in UAE or has business establishment only in UAE or has source of income only in UAE, then his economic relation would only lie in UAE. Under such a scenario he would become resident of UAE.

If he has personal and economic relation both in India and in UAE, the next tie breaker test is where does he habitually abode (reside). Habitually abode criteria is decided based on period of time one stay in a country. If a person actually resides only in UAE and occasionally visits India, he would be resident of UAE.

Thus, the following scenario would illustrate this tie breaker rule:

1)            An Indian citizen has permanent home only in India and he starts staying in UAE to avoid payment of tax in India. In this case he would be resident in India and would be liable to tax in India on global income.

2)            An Indian citizen has permanent home in India and personal and economic relation as well only in India and to avoid payment of taxes in India he starts staying in India. He also buys a house in UAE but personal and economic relation remains in India.  In this case he would be resident in India and would be liable to tax in India on global income.

3)            On the other hand, if an Indian citizen has permanent home only in UAE he would be resident in UAE and would not be hit by this new provision.

4)            Further, if he has permanent home in both India and UAE but personal and economic interest only in UAE. For example he is having employment or business establishment or source of income only in UAE. In this case he will be resident of UAE and would not be hit by this new provision. 

5)            In another situation, if Indian citizen has permanent home as well as personal and economic interest both in India and UAE and if he stay in UAE regularly and occasionally visits India, his place of habitual abode would be in UAE and he would be resident of UAE and would not be hit by this provision.

Thus an Indian citizen who is having a permanent home in UAE and have his employment or business in UAE and most of the time stay in UAE would not be hit by this provision and would remain resident of UAE.