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DTC and NRIs

Posted by cvbasheer on June 22, 2011


The recently released DTC Bill has unraveled some unpleasant surprises for the NRIs, Rohit Bothra, senior tax professional with Ernst & Young lists down the proposed changes, which the NRI community need to be vigilant about.

The much awaited Direct Tax Code, 2010 (DTC) is finally before the public and the Hon’ble Finance Minister’s effort to maximise the collection of direct tax revenue by widening and deepening the tax net appears to hit the Indians working abroad (NRIs).

The major change introduced by the DTC is in the criteria of determining the residential status of NRIs who, are working abroad, and come on visit to India. Currently, such NRIs who are citizen of India or Person of Indian Origin (PIO) are regarded as resident, only if, they stay in India for 182 days or more in the financial year.

However, under the proposed DTC, any inbound individual (including NRIs/PIO) will become resident, if they are present in India for 60 days or more in the financial year and 365 days or more over a period of four years prior to the financial year and would be liable to pay taxes on their Global Income.

This change would have an adverse impact on the NRIs frequently visiting India either for personal or business visits, since, they now need to plan and check the duration of each of their visits in any year to avoid becoming resident.

However, a resident would be eligible to claim exemption of income accruing to him/her outside India, from a source other than a business controlled in or a profession set up in India, if the resident:

1. has been a non-resident in India in nine out of ten preceding financial years; or

2. has been in India for less than 730 days, during the seven preceding financial years

Thus, NRIs who become resident of India may not be required to pay tax on their global income, if they satisfy any of the above mentioned conditions.

NRI income to be computed under two broad heads

The other major change introduced by the DTC is with respect to computation of income, which now needs to be computed under two broad heads – income from ordinary source and income from special source.

The special source computation requires certain income (interest, dividends by company and profit distributed by a fund on which distribution tax has not been paid, royalty or fees for technical services and income by way of insurance including reinsurance) earned by non residents to be taxed at a specified rate instead of the normal slab rate applicable to individuals.

Moreover, no deduction on account of investment/expenditure in LIC, PF, tuition fees, etc would be available against income from special source.

Under the present domestic law, NRIs have an option to be taxed on specified income (being investment income or income by way of long-term capital gains on foreign exchange asset) at special rates without certain benefits (such as indexation, deductions etc.) or at normal rates with benefits.

Taxable income for NRIs

Under the proposed DTC these optional approaches of taxation have been discontinued and investment income (being interest and dividend) from any asset is taxable under the head Income from special source at specified rates (gross basis without any deduction) and all other income is taxable under the head Income from ordinary sources at normal slab rates.

Thus, an NRI who has earned investment income in India amounting to Rs 2.6 lakhs may not be required to pay any tax in India under the current provisions, if he has eligible investment/ expenditure, the benefit of which can be availed upto the specified limit (Rs 1 lakh) and the normal slab benefit of Rs 1.6 lakhs.

However, under DTC, on the same income the NRI would be required to pay taxes of Rs 52,000 (@20% on Rs 2.6 lakhs).

Though apparently, the above provision appears to be really harsh on the NRIs, the same may even offer a benefit to NRIs who are subject to tax at the rate of 30% in prevailing law and will be taxable @ 20% under the proposed DTC.

NRIs be aware of the provisions of proposed DTC

Thus, the principal of progressive taxation and equity in tax laws seems to get defeated in this case.

Moreover, proposed DTC specifically provides that a non-resident shall not be entitled to claim relief under the provisions of the relevant tax treaty, unless, a certificate of tax residence is obtained by him from the tax authority of the overseas country in a prescribed form.

While this certificate is practically required under the current provisions also (if the case was picked up for assessments); in the proposed DTC the same will become a mandatory requirement.

In summary, a word of caution for NRIs – (be) aware of the provisions of proposed DTC and be learned so as to plan accordingly in advance before 1 April 2012.

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