NRIs try to sidestep ‘deemed residency’ tax – The Economic Times

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These individuals are booking a slice of their income in jurisdictions like Singapore and Hong Kong to pay a small tax there in the hope that they would escape the glare of the Income Tax (I-T) department in India. Whether their aggressive strategy pays off would depend on how sternly tax officials interpret the law.

Many wealthy Indians with businesses and jobs abroad are trying to get around the country’s new tax rule that targets the global income of its citizens.

These individuals are booking a slice of their income in jurisdictions like Singapore and Hong Kong to pay a small tax there in the hope that they would escape the glare of the Income Tax (I-T) department in India. Whether their aggressive strategy pays off would depend on how sternly tax officials interpret the law.

According to a change in the tax statute that became effective from the assessment year beginning April 1, 2021, Indians residing overseas and earning Rs 15 lakh and above from domestic sources such as fixed deposits, dividend and rent from India will have to pay tax on what they earn outside if that global income is not taxed in any other country.

Indian diamond merchants in Belgium and Hong Kong, international traders based in the Middle East, and business families staying in the UK have for decades been keeping their overseas income in zero-tax countries like the UAE. It has been an accepted tax planning for legitimate income till sovereigns, battling declining revenues, snooped around for untaxed income of their citizens.


“The provisions with regard to NRIs and their taxability in India have turned significantly complex. Based on a plain reading of the law, NRIs having taxable income in say Hong Kong or UK or any other jurisdiction, should not be taxable in India even if amounts of tax paid in these jurisdictions are minimal,” said Mitil Chokshi, partner at Chokshi & Chokshi.

Tax Havens may Lose Some Charm
Unlike a resident Indian whose global income is taxed, NRIs are taxed only on income earned in India but not on the income earned outside India. A person is considered resident if the period of stay in India is 182 days or more; or if a person has more than Rs 15 lakh domestic income and spends 120 days or more in India. However, in the newly introduced “deemed residency” rule, an NRI having domestic income (in excess of Rs 15 lakh) shall be ‘deemed to be resident of India’ irrespective of the number of days spent in India if the person’s global income is not liable to be taxed in any other country. With this, the ‘days spent’ mechanism (under section 6 (1) of the Income Tax Act), stands overridden for such NRIs.

An implication of the deemed residency rule would be that NRIs working in ‘direct tax’ neutral countries like UAE and Saudi, but having domestic income upwards of Rs 15 lakh, will be considered a resident of India for income tax purpose. The rule will apply even if an NRI has not spent a single day in India in the relevant financial year. Consequently, this foreign income will be exposed to tax in India.

Under the circumstances, many well-heeled Indians in the Gulf, who now feel vulnerable, are recording a part of their income in the UK, or Singapore where direct onshore income is taxed. The question is: can an NRI avoid tax on 90% of global income by agreeing to pay tax on 10% of the pie? Not all agree with Chokshi. “If the I-T department ‘looks through’ such plans, if it feels it was simply done to sidestep the law, the strategy will come under scrutiny. ‘Deemed residency is a new concept’ and we will figure out a year later. But such a deemed residency mechanism may result in dissuading Indian citizens from taking up employment in or setting up businesses in direct tax neutral countries i.e. primarily the Gulf and Middle East region,” said Amish Tandon, partner at Innovatus Law.

It’s unclear how and to what extent such overseas income would be taxed, said Rajesh Shah, chairman of the research committee of Chamber of Tax Consultants. But, like Tandon, Shah thinks that the amended law would definitely impact individuals with legitimate assets and income in tax neutral places like Dubai or in countries which do not tax global income. Many NRIs, who are not familiar with such clever tax planning but have more than Rs 15 lakh income in India following years of careful saving, could feel victimised by the change in law. Obtaining a tax residency certificate from a foreign country may not help in the absence of actual income tax in countries like the UAE.

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