The NR EYE: NRIs to pay more tax if they stay more in India by MOIZ MANNAN
Posted by cvbasheer on June 22, 2011
Overseas Indians would now be severely restricted with regard to their length of stay in India if they were to avoid paying income tax on their global income. A Bill to that effect was introduced in the Indian Parliament last week and if approved is sure to cause a lot of worry to non-resident Indians (NRIs). Perhaps the most severely hit would be NRI businessmen in the Gulf who continue to have business interests at home and thus are frequent visitors.
The new Direct Tax Code (DTC) bill introduced in Parliament proposes to impose tax on the global income of NRIs if they stay in India for a period or periods amounting to 60 or more days in a year. Under the existing Income Tax Act, 1961, an NRI is liable to pay tax on global income if he is in India in that year for a period or periods amounting to 182 days. Thus, if an NRI wants to escape the tax net he will have to spend 10 months out of the country compared to six months under the existing law.
The new code is expected to come into effect from April 1, 2012. The DTC also retains the existing provision under which an NRI is also liable to pay tax on his global income if he resides in India for a period of 365 days or more over a period of four years prior to the assessment year. In addition, the DTC has also removed the Resident Not Ordinarily Resident (RNOR) category to simplify the tax laws. Now, there would be only two categories, Resident and Non-Resident.
According to experts, under the proposed dispensation, a non-resident would be at greater risk of becoming an ordinary citizen and become liable to pay tax in India as the threshold limit has been reduced. Officials have been quoted by the media as saying that a phrase being outside India in the existing income tax law exempted individuals who stayed outside the country for six months from paying taxes. This was prone to misuse and allowed individuals to escape tax in any country.
More than 25 million Indians stay overseas and one million visit the country every year. A large number of NRIs particularly those working in the gulf countries usually visit India for longer durations. They will be given relief from payment of tax for two years on their global income in the transition period when they become resident from non-resident, a Central Board of Direct Taxes (CBDT) official has been quoted as saying.
Financial expert A.N.Shanbag of Wonderland Consultants says, Whether NRIs and PIOs will agree – especially with the last point is a moot question for a finer reading of the DTC seems to suggest that its the diaspora who seems to have been the most adversely affected constituency under the DTC. He makes the point with an example of an NRI who, say, currently earns Rs2,00,000 as NRO interest. With the protection of the basic exemption limit of Rs1,60,000, only Rs40,000 would be taxed at the rates of 10 per cent resulting in a tax liability of Rs4,000. Under DTC, straightaway a flat rate of 20 per cent tax would apply thereby resulting in a tax payable of Rs40,000 – ten times the earlier amount.
Another provision with a sharp impact is that the hitherto fully exempt long-term capital gains on equity and equity mutual funds are slated to be taxed at a flat rate of 30 per cent. The discrepencies in the provisions are so vast that while a resident Indian will be required to pay tax of Rs3,84,000 on his taxable income of Rs25,00,000, an NRI earning equivalent capital gains will be called upon to pay almost double tax of Rs7,50,000.
However, Shanbag says, what will come as a blow to most NRIs and investors in property is that even for let out or deemed let out properties, tax will be payable on the higher of the actual or presumptive rent. This presumptive rent is a new concept under the DTC. Presumptive rent is fixed at 6% of the ratable value fixed by the local authority. Where no ratable value has been fixed, 6% shall be calculated with reference to the cost of construction or acquisition of the property.
There is one good provision, though, for returning NRIs. An exemption has been provided in case of income earned outside India, if it is not derived from a business controlled from India, in the financial year in which the returning NRI becomes an Indian resident and the immediately succeeding financial year. However, the benefit of the said exemption would be available, only if such individual was a non-resident for nine years immediately preceding the financial year in which he becomes a resident.
The proposed code provides for wealth tax liability in the case of the value of all global assets of an individual or HUF (Hindu Undivided Family). However, an exemption has been provided in case of the value of assets located outside India in case of an individual who is not a citizen of India or an individual or HUF not resident in India. Hence, while returning NRIs who are non-citizens will enjoy wealth-tax exemption for their overseas assets, NRIs with Indian citizenship becoming residents will attract wealth-tax liability on such assets held abroad.