Indian Finance Minister Nirmala Seetharaman all set to present the 2020 Budget
packed with good intentions, but will it deliver? India's Finance Minister Nirmala Seetharaman ahead of unveiling the 2020-21 budget. Image Credit: Supplied

Dubai: Surely, the bureaucrats at India’s Finance Ministry could have done better than this. When the economy has stalled, the banking sector is crumbling under loans turning toxic, and key sectors such as real estate and automotive are in dire straits, the bureaucrats shouldn’t be thinking about NRIs… and how best to tax them.

And definitely not on the same day that a market-friendly budget was announced and met by a 1,000 point drop on the main stock index.

If they were indeed that intent about “non-residents”, their attention should have been diverted to getting back some of the hundreds of millions of dollars owed by Messrs. Vijay Mallya, Nirav Modi and Mehul Choksi. Instead, these bureaucrats – some of the best minds in government – want to police how long NRIs reside in India.

This is an excerpt from a circular issued by the Ministry and sent to currency exchange houses and others on Saturday (February 1). “Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year, is being misused,” it says. “Individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.”

Optics gone wrong

That the circular was issued on the same day as the Budget for 2020-21 was announced doesn’t say much about the timing. More so, as the Finance Minister Nirmala Sitharaman had tabled a proposal that would allow NRIs to invest in Indian Government bond issues for the very first time.

Now, the irony is that this investor base is who will come under the scanner of the Ministry and its various enforcement arms for staying in the country for 120 days in a year.

Dr. Azad Moopen, Chairman and Managing Director DM Aster Healthcare, puts the situation into context – “The number of days an NRI can spend in India to be get tax exemption is reduced from 182 days to 120 days. This will have an impact on businesses having significant investments in India like us.

“Our India listed company has 13 hospitals in India invested through the FDI route, whereas we have only 12 hospitals in GCC. Out of our 20,000 employees, the majority are in India.

“This naturally requires us to spend significant time in India. Even in the case of others like offshore workers who get one-month off after one-year of work, this will be a great disadvantage.

“The Budget proposals have created huge anxiety and significant confusion among the NRI community. While there are no benefits in the budget for the NRIs - who send billions to their motherland to shore up its foreign currency reserves every year - it appears the Central Government is trying to put them into difficulty through some of the proposals.”

Dr Azad Moopen , Founder Chairman & Managing Director , Aster DM Healthcare-1571909077450
Dr. Azad Moopen has serious doubts over the way the 120-day stay deadline will be implemented. Image Credit: Supplied

Will NRIs pay taxes?

This is the line from the Finance Ministry circular that has NRIs worried – “An Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India. This amendment will take effect from April, 1, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.”

Some tax experts in the UAE say this will not apply to UAE based NRIs, and even those in the other Gulf states. India has double-taxation avoidance treaties with them, which means income generated in one country will not be subject to a tax in the other.

But there are others who feel that double-taxation avoidance treaties are increasingly becoming redundant. More so, as India wants to crack down on those who derive most of their income from within India, but take out an NRI status to allow them some flexibility in what they pay as tax. (Some of India’s film stars have opted for this route, while others have taken up citizenships elsewhere.)

So, it is for the Finance Ministry to clarify how the system works for those NRIs or their dependents who may have to reside in India for up to 120 days or more in a year. Will they be fully exempted?

Some exemptions, yes

Under certain circumstances, NRIs are granted exemptions from being classified as “resident Indians” if they stay for a certain period.

The circular states: “This category has been carved out essentially to ensure that a non-resident is not suddenly faced with the compliance requirement of a resident, merely because he spends more than specified number of days in India during a particular year.”

This was the case when NRI could stay for up to 180 days a year without a change to their status. But here comes the rider – the conditions specified have been the subject of “disputes, amendments and further disputes”. This is an admission given in the circular itself.

With the number of days dropping to 120, “There would be need for relaxation in the conditions,” the circular adds.

Targeting NRI businessmen
The new requirements are aimed squarely at the wealthy NRIs. But Tariq Chauhan, Managing Director at EFS Group, says: "It just does not make sense as it's not easy to assess income of people living abroad. The administrative process and bilateral complications is too complex.
"Hope some clarity comes, but surely this panic is uncalled for."

Not convinced

Dr. Moopen is not convinced – “The more worrying proposal is regarding taxation of NRIs living in countries where there is no direct tax. There has been lack of clarity on this rule, and some experts have opined that this won’t be applicable to NRIs who are resident in a foreign country , but only to people who go to multiple countries without resident status.

“If this is applicable to residents of Gulf countries - where there is no personal income tax , the impact will be huge. These countries have high government charges and indirect taxes like VAT and customs.

“If this proposal is carried out, an NRI in Dubai with a salary of even Dh2,000 a month will be in the tax bracket as the exemption of Indians is up to 500,000 rupees.”

A word in favour

But there are some who reckon the Finance Ministry’s move is to curb abuses in the system than target NRIs randomly. “Though the proposed changes look harsh and will impact negatively on NRI investment back in India in the short run, being traditional, we like to invest in our country not just to claim the tax benefits but also to have a safe investment,” Jitendra Gianchandani, Chairman at JCG, a consultancy.

“Proposed changes are mainly targeted on residents who are abusing the system and avoiding paying tax in India and abroad.”

But in India, there’s always a gap between intentions and implementation. Which NRIs will get affected by the change will only be known with time.

Why did Finance Ministry issue 120-day rule?
“The issue of stateless persons has been bothering the tax world for quite some time,” says the circular issued on February 1. “It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn.
“Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs 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; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.”