DTC Bill brings bad news for NRIs
Direct Taxes Code Bill proposed to make an NRI liable to pay tax on global income
The new DTC (Direct Taxes Code) Bill has been proposed in order to make an NRI liable to pay tax on global income if he resides in India in a particular year. In addition, the DTC has also removed the ‘Resident Not Ordinarily Resident (RNOR)’ category to simplify the tax laws. The DTC hopes to plug loopholes with the proposed changes with the aim of preventing tax evasion through this route.
Non-Resident Indian (NRI)
An Indian staying abroad is popularly known as Non-Resident Indian (NRI). As per the existing Income Tax laws, a non-resident Indian is not liable to pay tax on income which accrues outside India. The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act).
If an individual who satisfies understated both the conditions of section 6 of the Income-tax Act, then he/she becomes a Non-Resident.
- If the person is not in India for 182 days or more during the relevant previous year.
- If the person is not in India for 60 days or more during the previous year and he/she is not in India for 365 days or more during the 4 years prior to the previous year.
Resident Not Ordinarily Resident (RNOR)
As per the existing Income Tax laws, A NRI who has returned to India for good is covered under the provisions of section 6(6) of the Income-tax Act. He/she is given a special status of Resident but Not Ordinarily Resident (RNOR) if he/she satisfies one of the following conditions:
- If he/she is not a resident, as per the above provisions, for at least 9 out of 10 previous years prior to the previous year under consideration.
- If his/her stay in India during the 7 previous years prior to the previous year under consideration should not be 730 days or more.
An individual, who is has not resided in India for 9 consecutive years, shall remain RNOR for 2 subsequent years and as such his foreign income is not taxable in India while his status is that of RNOR.
Direct Taxes Code Bill 2010 proposal
The new DTC Bill has been proposed in order to make an NRI liable to pay tax on global income if he resides in India in a particular year for a period or periods amounting to 60 days, down from the existing provision of 182 days in the existing Income Tax Act. However, the present dispensation for taxation of global income if an NRI resides in India for 365 days or more over a four-year period has been retained in the proposed DTC.
In addition, the DTC has also removed the ‘Resident Not Ordinarily Resident (RNOR)’ category to simplify the tax laws. Now, there will be only two categories, ‘Resident’ and ‘Non-Resident’. The non-resident would be considered a resident if the threshold limit of stay has been exceeded for the purpose of imposing tax.
There would be liability on a resident belonging to a country where the tax rate is lower than India and there is a Double Taxation Avoidance Agreement (DTAA) between both the countries. In the case of a resident of a non-treaty country, which India has no DTAA with, the tax burden would be higher if he/she exceeds the threshold limit of stay in India. At present, India has comprehensive DTAAs with about 74 countries, including the USA, Singapore, UK, Thailand, South Africa, Saudi Arabia, New Zealand and Australia.
Experts feel that the DTC proposal could be a damper for NRIs visiting India to meet their relatives or for business promotion.
The concept of “resident but not ordinary resident” (RNOR) for individuals and Hindu undivided families (HUFs) is replaced by providing specific exemption from the total income of an individual with respect to the income sourced outside India and not derived from a business controlled or a profession set up in India on the same lines as currently applicable.
Further, if a person is resident, the wealth tax provisions shall also apply to global assets. The additional assets which have been brought under the purview of Wealth tax by DTC include bank deposits outside India, any interest in a foreign trust or any other body located outside India (whether incorporated or not) as well as any equity or preference shares held by a resident in a Controlled Foreign Company (CFC). These assets will be liable to annual wealth tax @ 1% subject to basic exemption limit of 1 crore. The above assets are of particular relevance to non-resident Indians who may now be treated as resident as a significant part of their assets outside India could now be chargeable to wealth tax.
The DTC proposes to tax transfer of shares of a foreign company, on the basis that there is a transfer of a capital asset situated in India, if the fair values of the assets situated in India constitute at least 50% of the assets directly or indirectly held by the foreign company.
Introduction of CFC regulations would result in taxing income of certain overseas companies in the hands of their Indian resident shareholders, even before such income is distributed. This may impact non-residents Indians who may now be treated as residents due to the above change in the definition.
Further, an overseas company with a place of “effective management” in India will now be treated as a tax resident in India and would be consequently liable to tax in India on its global income. Earlier, such companies were liable to tax only if they were “wholly controlled and managed” from India. The CFC regulations become applicable where Indian residents, individually or collectively, hold 50% or more of the share capital of the foreign company located in a low tax jurisdiction and the foreign company derives income pre-dominantly from investment or passive sources or from associated enterprises.
Courtesy: economictimes.indiatimes.com
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How would the Indian government react if USA and UK reciprocate by taxing worldwide income of Indian visitors whose visits exceed 59 days in an year?