Finance Bill clauses on deciding residential status for taxation less menacing now

Prior to the change brought in by the Finance Act this year, an Indian citizen or a Person of Indian Origin (PIO) visiting India could stay in India for less than 182 days and retain his/her status as a non-resident. The Finance Bill proposed to reduce this period of 182 days to 120 days. However, while passing the Bill, this reduced period of 120 days was made applicable only to Indian citizens or PIOs who have taxable income excluding `income from foreign sources’ exceeding Rs 15 lakh. In simple words, if a person has Indian income exceeding Rs 15 lakh, he will be subjected to the reduced limit of 120 days stay in India. Such a person would be considered as a resident if he stayed in India for 120 days or more. However, in the case of a person who does not have taxable income excluding `income from foreign sources’ exceeding Rs 15 lakh, the old limit of 182 days will continue to apply.

The new provision defines `income from foreign sources’ as income which accrues or arises outside India.  Thus, the salary income of a person having a job outside India will be foreign-sourced income which will not be considered for the limit of Rs 15 lakh. However, income earned from a professional set up in India will not be considered as income accruing outside India. For example, if a lawyer who has set up his practice in India earns professional income by rendering services outside India from foreign clients, such income will not be considered as foreign-sourced income. Similarly, income earned from a business which is controlled from India will not be considered as income accruing outside India.

A person who becomes a resident under the new provision will be considered as `not ordinarily resident’ (NOR). Due to his status being taken as NOR, his global income will not be taxable in India. In such a case, only income which accrues or arises to him in India and income from profession set up in or business controlled from India will be taxable in India. The rigours of the new provision have been substantially reduced and, in most cases, income earned outside India will not be taxable in India even though a person may become a resident.

Another change that was proposed in the Finance Bill was to introduce a new provision for `Stateless Indian citizens’. It was proposed that if an Indian citizen is not liable to tax in any country on account of his stay or domicile, he will be considered as a resident in India. While passing the Bill, the application of this proposal has been restricted to persons having taxable income excluding `income from foreign sources’ exceeding Rs 15 lakh. Further, a person who becomes a resident under this clause will be treated as NOR. Consequentially, even though a resident, such a person will not be liable to tax on his global income.

Clarifications needed

The changes made while passing the Finance Bill have made the new provisions far less menacing. However, some doubts and confusions continue. For example, to determine the residential status, one has to compute total income excluding the foreign source of income. But in certain cases, income computation itself depends upon the residential status. This leads to a confusion as to what would need to be determined first – the residential status or the taxable income? The government will have to come out with a clarification.

Confusion also continues for Indian citizens in countries where no tax is levied on individuals, e.g., the UAE. It appears that the Government considers persons living there as not liable to tax on account of their stay or domicile. As a result, they may become resident under the new provision for Stateless citizens. While there is an equally strong contrary view, since in most cases foreign income will not be taxable even under the new provision, the issue may not assume importance.

To become an NOR, a person must be a non-resident for at least nine out of 10 earlier financial years or his total stay in India should not be more than 730 days in the preceding 7 financial years. In the Finance Bill, it was proposed to reduce the period of nine years to seven years. However, this beneficial proposal has been dropped while passing the Bill. As a consequence, persons who become residents due to the new provisions, will become ordinary resident in India and will be liable to tax on their world income more or less immediately on their return to India.

(The author is a Chartered Accountant and views are personal)