The Honorable finance minister presented the Finance Bill proposals for 2020-21, aka Budget proposals for the next financial year. While the next few days, it will remain in focus and discussed threadbare by financial experts, a very small part of Non-Resident-Indians in the budget proposals is raising a lot of concern among the sizeable Indians in the middle east. To quote from the budget speech text:
"It is proposed to reduce the time of stay in India from 182 days to 120 days for an Indian citizen or person of Indian origin to become a resident in India. Consequently, it is proposed to relax the provision of “resident but not ordinarily resident” so that a resident who has been non-resident in seven out of ten previous years would be resident but not ordinarily resident. It is also proposed to provide that an Indian citizen who is not liable to tax anywhere would be deemed to be a resident in India. "
The first part of the reduction in the number of days stay in India is not a big concern as most of the Gulf NRIs anyway visit on holidays which is not more than 30 days annually, but the second part of taxing NRI's not liable for tax anywhere is a big concern. This was also raised in the press conference post the budget presentation.
The Gulf region does not have an income tax, even Value Added Tax was only introduced as late as in 2018. Technically, NRI's in the Gulf region are not liable for any tax in their country of residence, as there is no income tax in the region on any residents. Till this minor change has been proposed, NRI's were subject to tax on the basis of double taxation avoidance (DTA) treaties, which stipulates that Indian residents in other countries with whom DTA exists will be subjected to tax as per their country of residence for their income outside India. This meant that NRIs in the Gulf region had no tax liability.
This lack of tax liability is now being made the core aspect of taxing overseas income in India. The most hit are of course NRI's who are on employment in the Gulf region. They are hit as while there are no taxes on income in the region, the same is compensated by the cost of staying here by way of higher rents and service charges for government actions to stay here. Now there will also be a tax liability on their income earned here.
A clarification provided in the press conference post the budget was to highlight that several Indians were not a resident of any country other than India but availed of the Non-Resident Status for Income tax purposes by staying outside India for more than the stipulated 180 days. There is a disconnect with this clarification and the text of the budget speech. As if this was the target group of people, then the term not resident in any other country could have been used instead of not eligible for taxes. The former term would be coverage for a resident of Gulf countries as they can prove their residency status, while the latter does not consider the residence status, but only the liability to pay taxes in their country of residence.
Further, even, if we were to consider that the Government of India comes out with a clear written clarification to address the concerns of Gulf NRIs, the basis of implementation would be the provision of Tax Domicile Certificates, this again would not be a feasible option for a significant percentage of the low-income NRIs, consider the cost of The Tax Domicile Certificate in UAE, it is approximately INR. 50,000/- plus and is valid for one year. This itself will become an implied tax or a surcharge for the NRIs.
Any major change does raise negativity, however, if we consider the global scenario, most of the big economies tax their citizens on their global income. FATCA is a case in point where the United States of America is building its database on overseas American's bank details for future use to catch tax evaders. India considering the same is not surprising, but it needs to be well thought out and implemented properly.
While these are proposals and still need to be passed by the two houses of parliament, we can expect the state of Kerala which has a major percentage of residents in the Gulf region to fight this proposal tooth and nail.
UPDATE 02-02-2020
Given the confusion created by the budget proposals on NRI income abroad. The ministry has issued a clarification to put to rest the concerns of Gulf NRIs.
Click here for the clarification issued
The clarification specifically addresses the concern of NRIs in the middle east and clarifies that income earned outside India will not be subjected to tax in India.
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