The Budget has tightened the screws on those seeking to escape tax by exploiting their non-resident status. While earlier it was possible to be classified as non-resident by staying out of the country for 183 days or about six months in a year, this has now been, in effect, enhanced to 245 days.

The change has been made because some taxpayers divided their time between India and overseas to avoid being categorised as tax residents in India. Once a tax resident is further classified as ordinarily resident (OR), he pays tax in India on his global income, which would include say interest income on overseas bank accounts.

As Parizad Sirwalla , partner and head, global mobility services (tax) at KPMG India points out, “Indian citizens and persons of Indian origin who were on visit to India had an extended period of 182 days of stay in India (as opposed to 60 days) before they could be regarded as a resident from an income tax perspective. This period is proposed to be reduced to 120 days now.”

As things stand, an individual is a resident in India for a particular financial year if he has been here for an overall period of 365 days or more within the four years preceding and an overall period of 60 days in that particular year. The 182-day relaxation was made available to Indian citizens and persons of Indian origin.

‘Only The Stateless Will Be Deemed Indian And Taxed’

The Budget memorandum pointed out that this relaxed duration of 182 days was misused by individuals who had significant economic activity in India (say a business), managed their period of stay, so as to remain a nonresident in perpetuity. With such individuals now being required to stay out of the country for 245 days in a year, the misuse becomes more difficult for those having business interests in India.

Gautam Nayak, tax partner at CNK & Associates cautions, “NRIs or Overseas Citizens of India, visiting relatives in India need to now be more careful and limit their stays to less than 120 days in a year, or else they may face tax on their worldwide income.”

After having determined an individual as a tax resident, there is a secondary test to determine whether the individual qualifies as a not ordinarily resident (NOR) or ordinarily resident (OR). Currently there are complex rules to determine when a person is NOR. This has been simplified to say that a person is NOR for a particular financial year if he has been a non-resident in seven out of the ten preceding years. This determination is critical as while an ‘NOR’ is only taxed on India income, an individual who is an ‘OR’ is taxable on his worldwide income.

Another change made is that an Indian citizen not ‘liable to tax’ in any other country or territory shall be deemed to be resident in India. At first glance, it appeared that India’s diaspora which works in Gulf countries (where there is no tax on individual income) would be badly hit.

However, the Finance Bill added that this would be the case if the individual is not liable to tax in any other country by reason of his domicile, or residence or any other criteria of similar nature. Nayak adds, “The SC in the case of Azadi Bachao Andolan has held that the term ‘liable to tax’ is not the same as ‘is actually taxed’. The OECD Model Tax Convention also provides that a person does not have to be actually paying tax to be “liable to tax”. If the host country chooses not to tax such income, it does not mean that they are not “liable to tax” in that country. They may still not be regarded as residents of India. However, the issue needs to be clarified to avoid litigation. This provision would therefore perhaps only impact those Indian citizens who are not residents of any country at all.”

ANI quoted the revenue secretary, Ajay Bhusan Pandey , as saying that only if an Indian citizen is not a resident of any country in the world, he will be deemed to be a resident of India and his worldwide income will be taxed. Amarpal S Chadha, partner and India mobility leader at EY-India says, “The intent behind this amendment is to tax the Indian citizens who are stateless and enjoy the privilege of not paying taxes in any country or jurisdiction, based on their tax planning. However, a formal clarification on this will be helpful to avoid litigation.”

