Worldwide tax proposed on Indians not paying tax in any other country
Indians residing in foreign countries were in for a shock when they learnt of a proposal under Budget 2020, which mentions that an Indian citizen – not liable to pay tax in any other country – shall be deemed to be resident in India and hence “liable to tax.”
The Finance Bill 2020 proposes to subject these “stateless persons” to worldwide tax.
Deeming such people who aren’t liable to tax in any other country and considering them as resident in India would mean that they would have to pay a tax ranging from 5 to 42.7 per cent on their global income, even though they do not enjoy any benefits in the country nor earn any income from India.
Rationale for tax
Explaining the reason for introducing this tax, the memorandum to the Budget 2020 mentions, “Tax laws should not encourage a situation where a person is not liable to tax in any country…particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.”
This would have repercussions on citizens residing in countries such as the UAE (Nil Income Tax, 5 per cent VAT introduced in 2018), Muscat and Monacco and aren’t liable to pay tax in those countries.
“Those employed in Merchant Navy too would be impacted by the move as they aren’t stationed in any particular country,” says Ameet Patel, partner at Manohar Chowdhry & Associates.
It is worth noting here that non-resident Indians living in the US, Canada, Singapore and Hong Kong already have worldwide tax in place or have taxation treaties in place with India.
“India follows a residency-based tax regime and not a source-based tax regime. Hence, any income earned by Indian-passport holders would be liable to be taxed, even though it was earned somewhere else, unless there is a tax-avoidance treaty in place. The proposal has been introduced to tax a person who is juggling between different countries to avoid tax. However, faulty drafting of the amendment would lead to implications on Indian citizens who travel on work permits to countries such as Dubai, which has a zero tax regime,” says chartered accountant Paras Savla.
It should be clarified here that ‘liable to tax’ doesn’t mean you will actually be taxed. But it would definitely force Indian passport holders to clarify their position and prove why they shouldn’t be subjected to tax in India at the prevalent slab rates even though they have been earning income abroad, purely because they haven’t been paying tax in any country.
“This creates room for disputes. The clause has once again brought to the forefront the meaning of the words ‘liable to tax,’ particularly in cases where the countries do not impose personal tax such as the UAE,” says Suresh Surana, founder RSM India.
Clarification from the government is awaited, apart from a brief remark in the press conference by Finance Minister Nirmala Sitharaman, “NRI Tax should be seen in the context of citizens of this country.”
NRIs however, saw a welcome announcement in terms of interest payment made to them on investments in bonds including Municipal Bonds, which would be offered at a concessional withholding rate of 5 per cent until June 30, 2023.
Non-resident Indians were even exempted from filing income tax returns in India if their total income consisted of dividend or interest income, royalty or fees for technical service and certain TDS income.Persons of Indian origin or those holding Indian passports need to now ensure a stay of less than 120 days during a year as against 182 days earlier.