Budget 2020 India: A day after the Union Budget 2020-21 was presented to Parliament, the government came out with a clarification on Sunday seeking to allay fears about a Budget proposal potentially inflating the tax liabilities in India of non-residents. Tax experts, however, insisted that the confusion would be fully removed only if the relevant memorandum and Finance Bill 2020 are accordingly reworded.
Citing instances where Indian citizens and PIOs with the non-resident tag misusing a facility for them to visit the country for longer periods to avoid having to pay tax in India on income arising from their activities here, the Budget reduced the India stay period for such non-residents. More importantly, the memorandum also said, "any person not liable to tax in any other country or territory shall be deemed to be resident in India", stoking fears that bona fide Indian citizens working in other countries such as the UAE would have to pay tax in India for income generated in their country of employment/business or other foreign countries.
Such taxation could have hit Indian diaspora hard and undermined employment opportunities for Indians in various low or no tax countries.
On Sunday, the government said, "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". It added, "The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries."
Separately, finance minister Nirmala Sitharaman told a group of journalists, "An NRI living in another country earns money there which is not taxed at all there and he has some earnings through something in India on which he does not pay tax here either because he does not live here. What we are essentially saying is that, for the income generated in India, pay a tax. If you have a property here that generates rental income here, but because you live there, you carry this income there and pay tax neither there nor here. Have I got even a sovereign right to take that into my consideration or not? I am not taxing what you earn in Dubai."
However, tax experts say income generated in India by an NRI was anyway taxable in India. If people have not been doing so, that should be dealt with as tax evasion, rather than through the introduction of a potentially contentious concept of ‘deemed residents". As the Finance Bill and the memorandum are worded, NRIs workers in countries without income tax liability could qualify as deemed residents and be liable to be taxed in India for their income generated in these countries.
Explaining the rationale behind the Budget proposals, the government said that the issue of stateless persons has been bothering the tax authorities in the world for quote some time with instances of individuals shifting stays over countries to avoid paying tax anywhere. "The current rules governing tax residence makes it possible for High Net Worth Individuals and other individuals who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable".
India, the world’s largest recipient of foreign remittances, saw inflows of $79 billion in 2018. A large part of the remittances come from West Asian countries.
Shefali Goradia, partner at Deloitte India said: "Reducing the threshold of physical presence in India to 120 days in a year from 182 days (for retaining NRI tag) will make visiting NRIs more conscious of their travel dates. On one hand, the government has been keen to attract talent and onshore the funds and fund managers whereas on the other hand, this move will disincentivize people from spending more time in India. Businesses are mobile and with a view to attract entrepreneurs to India, FM should consider restoring the prior threshold".
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Separately, tax experts said while the Budget acceded to the long-standing demand of start-ups for deferred tax payment on employees stock option plans (ESOPs), it would only available to those firms that are certified as start-ups by the inter-ministerial board (IMB). Siddharth Pai, founding partner at 3one4 Capital in an article said: "If one reads the fine print of the Finance Bill 2020, under section 156, there exists a pernicious insertion in the form of a qualifier in order for a start-up to avail of this: the startup should be recognised by the IMB (Inter-Ministerial Board), a government body that certifies a startup as "innovative" Out of the 50,000+ startups in India, only 27,000+ are registered with DPIIT; of these, only a fraction have received IMB certification due to the process. Only these IMB certified startups can avail of this."