Non-Resident Indian Citizen to be taxed on Global Income as Resident

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The Union Budget 2020 proposed to introduce a deeming provision that every Indian citizen who is not liable to tax in any other country, shall be deemed as a resident of India.


Under the Income Tax Act, 1961, the residential status of a person may be a resident or a non-resident. In the case of a resident, he is liable to tax in India in respect of his world-wide or global income whereas a non-resident is only liable to tax in India only on such incomes that arise or accrue in India. A non-resident is not liable to world-wide or global income in India.

In the case of an individual, whether he is a resident or a non-resident is determined on the basis of his stay in India. Further, a resident or a non-resident may be an Indian Citizen or a foreign national. Further, a resident is further divided into 'ordinary residents' (ROR) and 'resident but not ordinary resident' (RNOR). The residential status can change each year.

Further, there are certain provisions which are exclusively applicable for non-resident Indians. As per section 115C(e), a "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident".

In other words, a non-resident Indian means a non-resident Indian Citizen or a person of Indian origin.

A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

In other words, the following persons shall be considered as a 'person of Indian origin'-

1. The taxpayer himself if born in undivided India.
2. The taxpayers' either father or mother or both born in undivided India.
3. The taxpayers' either grandfather or grandmother or both born in undivided India.

The provisions related to the determination of the residential status of a person are contained in section 6 of the Act.

As stated above, a resident Individual is liable to pay tax in India in respect of his Indian as well as the foreign source of income. In addition to this, a resident is required to disclose his foreign assets, foreign bank accounts, and many other foreign details in the ITR. Thus, a resident having any such foreign assets cannot file ITR-1.

On the contrary, a non-resident Individual is not liable to tax in India in respect of his foreign source of income. Further, he is not required to disclose any foreign assets, etc in the ITR even though a non-resident cannot use ITR-1.

A high net-worth Individual can escape from Indian taxation if he manages his stay in India in such a manner that he stays in India for a period of less than 182 days in a financial year to become a non-resident. Once he becomes non-resident under the Income Tax Act, 1961, he is not required to disclose and pay tax on his foreign income. Furthermore, he is not required to disclose any of the foreign assets, etc in the ITR. He will be liable to pay tax in respect of income earned in India only.

A resident Indian individual has to file returns only in India, while a non-resident Indian individual may need to file returns in the country of residence as well as in India.

In this context, it is pertinent to note that he may become a resident in any other country and then he may have to pay tax on global income as per the residential rule of that country. In such a case, he has to pay tax again in the foreign country on his Indian Income (though he may get the credit for taxes paid in India.) Normally, all the countries' tax rules provide for taxation of global income on a resident.

Many individuals manage their stay in several countries in a year in such a manner that he does not become 'resident' in any country either in India or in any foreign country and thus does not pay tax in any country.

The Budget 2020 has proposed to provide that an Indian citizen who is not liable to tax anywhere would be deemed to be resident in India.

The issue of stateless persons has been bothering the tax world for quite some time. 

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 or jurisdiction on the 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 an 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. 

In the light of above, it is proposed that an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.

For this purpose, an amendment is proposed in section 6 of the Income Tax Act, 1961 vide clause 4(b) of the Finance Bill, 2020 which reads as under-

Amendment of section 6.
4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,–
(a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty-two days", the words “one hundred and twenty days” shall be substituted;

(b) after clause (1), the following clause shall be inserted, namely:–
“ (1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

(c) for clause (6), the following clause shall be substituted, namely:–

' (6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is-

(a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or

(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.'

[There are two other amendments in section 6 by Clause 4(a) and 4(c) of the Finance Bill, 2020. Since they are not related to the topic, hence not discussed in this article.]

It is proposed to insert clause (1A) in section 6 after clause (1) thereof so as to provide that notwithstanding anything contained in that sub-section, an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

These amendments will take effect from 1st April 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years

The proposal to introduce a deeming provision that every Indian citizen who is not liable to tax in any other country, shall be deemed as a resident of India. Consequently, he will be taxed in India as a resident and his global income would be taxable in India. The income earned in India as well as earned in a foreign country would be taxable in India. Further, he has to disclose all his foreign assets, etc. in the ITR from which he was exempt in earlier years due to non-resident status. This will adversely impact HNWIs using the domicile mechanism to evade tax globally. Hence, it is said to be an anti-abuse provision.

Although the intention is said to tax only those person who misuses this provision, but the same seems to have misfired because of the drafting quality of the provision. The amendment has created panic among the Indians who are residing and earning abroad from those countries which do not levy any income tax on their residents' income. This resulted in an apprehension among Indian citizens who are employed or have business interests or are residing outside India that does not levy any tax.

The expression 'liable to tax' used in the provision suggests that if an Indian Citizen is residing in a foreign country which does not levy any income tax on the income of their residents then is such a case he shall be deemed be a resident in India and shall be required to pay tax in India on his foreign income. It has raised anxiety mainly among the Indians who are working in Middle-East or Gulf countries which does not levy tax in their country.

To illustrate this, let us take the example of Mr. Rakesh. He is an Indian Citizen and is employed with a Dubai-based company in Dubai, United Arab Emirates (UAE). His home in India is in Bangalore and comes on a visit to India for a few days once in two to three years. Under the income tax laws, he is a non-resident for the past 9 years. He is earning salary income from the company in Dubai. He has a two-storeyed house in Bangalore and one floor is let-out to a tenant.

Under these facts, since Mr. Rakesh is a non-resident in India, he is not to pay any tax on his foreign salary income. However, since the rental income is received in India in respect of the house property situated in India, he shall be liable to pay tax on such rental income in India. Hence, in India, he is paying income-tax only on the rental income and not on his foreign salary income in India.

However, he is a resident of the UAE under that country Income Tax Laws. UAE neither levy any tax on the domestic salary income nor on the foreign income which is the Indian rental Income.

Hence, the salary income is not suffering any income tax either in UAE or in India.

The proposed amednment has made Rakesh worried. This is because since he is not liable to tax in UAE due to his domicile or resdience in UAE and he is an Indian Citizen, he will be deemed to be a resident in India. Once he becomes a resident in India, he is required to pay tax in India on his foreign salary income as well. Further, he is subject to disclosure of his foreign assets, etc. in his Indian return of income or ITR.

It is apprehended that the proposed amendment could impact non-resident Indians staying in countries such as UAE which does not impose income tax on individuals under local tax laws.

To clear the confusion among the non-resident Indians, CBDT immediately issued a clarification on the very next day of Budget presentation. On 2nd February 2020, it released a press note and it was clarified 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.

The government has also clarified that the new rule is an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas. If a genuine non-resident Indian is earning something in a jurisdiction where there is no tax, the government is not interested in including such income into Indian income that has been generated there.

Hence, as per the clarification, a non-resident Indians (NRIs) working in an income tax-free jurisdiction such as the UAE will have to pay tax only on their income generated in India, and not on their earnings outside the country.

Such clarification has no legal force unless the clarification is included in the statute.

The immediate action of the government on the matter is no doubt is a welcome move but it did not clarify the expression 'liable to tax'.

Instead of issuing the clarification in the backdrop of the expression 'liable to tax' as used in the proposed amendment, it has stated a fact which is not written in the proposed provision.

As per the press note,

(i) an Indian citizen who becomes deemed resident of India under this proposed provision means he is not liable to tax in a foreign country, hence become a deemed resident in India.

As we know, a resident in India is liable to pay tax on its global income, but the press note adds-

(ii) income earned outside India by him shall not be taxed unless it is derived from an Indian business or profession.

As per existing provisions, a resident is subject to tax on his global income whether or not it is derived from an Indian business or profession.

The second part of the clarification issued by the press note may be introduced in the statute with an amendment.

What the clarification missed out is the use of the expression 'liable to tax' in the proposed provision. 

As per the proposed amendment, an Indian citizen who becomes deemed resident of India under this proposed provision income earned outside India by him shall be taxed in India, if such income is not liable to tax in that foreign country.

This confusion still prevails. Whether Mr. Rakesh, in the example given above, will become a resident or not because he is not 'liable to tax' in UAE?

Assuming that due to this fact, he becomes a deemed resident of India under the proposed amendment. As per the clarification, he will not be subject to tax in India in respect of his salary income earned in UAE. This is contrary to the existing provisions of the Act and a suitable amendment is required in the law to incorporate this clarification.

But it is the fact that the proposed deeming provision in Section 6(1A) would be subject to the DTAA, if any, between India and the foreign country in which the non-resident Indian citizen claims to be a resident.

Further, the clarification, at its face value, exempts him from payment of taxes in India from his foreign income but what about disclosure requirements in the ITR? The same also needs to be addressed. 

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