Most countries are under severe pressures, both internal and external, to tighten their tax laws and prevent their abuse or misuse. One significant issue is at the heart of this problem is the ability of individuals and corporates to move incomes or residential status to lower tax jurisdictions and reduce their overall taxes.
India has now taken a step to prevent such a shifting of the tax base. The country has introduced provisions that aim at taxing citizens who are either stateless or not ‘liable to tax’ in any other country. In simple terms, India has introduced provisions aimed at those individuals who were staying out of India to avoid being a tax resident of India and simultaneously staying in other countries while not qualifying as residents there. Or qualifying as residents in countries that impose no taxes.
While these ‘anti-abuse’ provisions are aimed at those individuals who were arranging their affairs to ensure they pay little or no taxes in India, the amendments could have certain unintended consequences.
Getting caught in tax net
The provisions relating to the determination of the residential status of a person for tax purposes in India has been amended with effect from April 1, 2021. The new provisions result in an Indian citizen who has income from Indian sources in excess of 1.5 million rupees being treated as a ‘resident’ in India if he or she is not ‘liable to tax’ in any other country by reason of domicile.
The term ‘liable to tax’ has been defined. That is where the unintended impact lies. The term has been now defined to mean “that there is an income-tax liability on such person under the law of that country for the time being in force”.
It is interesting to note that there is no exclusion for those countries that do not impose any income tax - such as the UAE. In light of this, a person who is a resident of the UAE would be considered as a person who is ‘not liable to tax’ in another country by residence (UAE) and, hence, making him or her a resident of India.
Typically, residents of India are liable to tax on their global income in India. However, in case of those persons deemed to be residents due to this clause will be subject to a different treatment. Their foreign income would not be taxed in India.
However, post the above amendment, income earned by such non-residents that accrue or arise in UAE but from a business/profession controlled from India or set up in India may become liable to tax in India, which earlier was not the case. This could also impact companies who are regarded as fiscally transparent as per the local tax laws governing them, or are situated in a country where there are no corporate or personal taxes (UAE, Saudi Arabia, etc.).
Not on salaries
The amendment neither seeks to impact salaries earned by non-residents Indians in the UAE nor other income sourced in the UAE (provided it is not arising from a business controlled in or a profession set up in India).
The Finance Minister of India recently clarified this very specifically in an interaction on social media and the finance ministry has also issued a clarification to this effect.
Given the narrow spectrum of this new definition, there could be several situations where a non-resident may not be regarded as ‘liable to tax’ in the country of residence and thus be treated as a resident of India. It would therefore be imperative to revisit business models/operating structures and make appropriate changes to not get caught in this if the intent was never to avoid taxes in India by managing the residential status.
This is imperative for those individuals who are running businesses outside India and have never had tax as consideration for deciding their country of residence.