Finance Minister in Budget 2020 has made some major changes to tax residency laws in India. The tax residency of a person was determined based on his/her stay in India (number of days). However, the government is of the view that some instances have come to light, where High Net Worth Individuals (HNI) have planned affairs in such a manner that they are not liable to tax in any country or territory. These "stateless persons" have been bothering the tax world for quite some time. Similarly, due to the current provisions governing the tax residency in India, various Indian citizens can avoid taxes.

To curb such practices, the current budget proposes to expand the definition of Indian residents to include those Indian citizens who are not liable to tax in any other country or territory. Earlier, an Indian citizen would become a resident only if he visits India for a particular number of days.

It seems that the intention is to capture Indian Citizens who have a significant business interest in India but plan their affairs in a manner that they remain non-resident and thus avoid paying tax on their overseas income. However, the proposed amendment may also end up impacting Indian citizens who are working or carrying out business in countries where there are no taxes. For example - an Indian Citizen who migrated to UAE for employment may be considered a resident of India irrespective of his visit to India since he would not be paying any taxes in UAE. Further, where he satisfies the additional condition of being a resident in 4 out of 10 previous years, he would be liable to be taxed in India on his global income.

These provisions appear to be very harsh and may lead to a situation where an Indian citizen who moves overseas for work/business may automatically become a resident and ordinary resident in India, and his global income would be taxable in India.

Illustration:

Mr. M an Indian citizen, moves out of India for a job in Dubai on 1 April 2020 and never comes back to India. He would become a resident and ordinary resident of India from FY 2020-2021 as he would be deemed to be a resident as per the new amendment as there is no tax in Dubai. Further, he would also satisfy the additional condition of being resident in 4 out of 10 previous tax years. Accordingly, his global income would be liable to be taxed in India.

Having said the above, in case of countries having a tax treaty with India, the taxpayer would be able to invoke the dual residency clause / tie-breaker test of the Tax Treaty and claim that as per the Tax Treaty, he still remains the resident of the Foreign Country.

This proposed change would significantly impact Indian Citizens who have genuinely moved outside India for employment or business opportunities. This proposed changed created a huger uproar amongst the Non-Resident Indian community. Accordingly, the Central Board of Direct Taxes (CBDT) swiftly issued a press release on Sunday, 2 February 2020, to clarify the provisions. The press release explains that new provisions are not intended to tax citizens who are bonafide workers in other countries. CBDT further clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him should 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.

While the press release and clarification would settle the nerves of Non-Resident Indians, we would like to highlight that provisions pertaining to taxing income derived from India were always there under the law, and there was no need for any amendment. However, with this amendment along with the corresponding amendment in criteria to qualify as a resident and ordinary resident, there are high chances that an overseas citizen in countries where there is no tax would become an ordinary resident of India. Once a person is an ordinary resident, his global income is taxable in India. As mentioned above, the individual can seek treaty protection wherever applicable.

It appears that the issue is still not settled. However, we hope that the government would make necessary amendments to the law, which are in line with the intention stated in the press release.

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