India and NRI were thought to be inseparable. Both needed each other during the good times and bad times (remember the run of the Indian foreign exchange after the nuclear testing in 1997). The NRI have immense capacity both in talent and in financial terms, that is and can be invested in an emerging India. India's remittances from overseas Indians, estimated at over $50 billion dollars in 2009, were the highest in the world.
Overseas Indians estimated at over 25 million and spread across the world, have come to be recognized for their knowledge, expertise, skills and resources.
Its foreign exchange reserves were dwindling rapidly and it was coming perilously close to defaulting on meeting its international payments obligation. And who came to India's rescue? Not the fair weather friends in the West. It was the UK NRI and USA NRI together with substantial numbers of NRI in the Gulf countries who invested via the Resurgent India Bond and Indian Millennium Deposits. Many Gujarati’s NRI are playing a key part in the development of Gujarat state and the rest of India.
If India fails, the foreign investors would desert them in an instance, but most NRIs (not all) would remain steadfast. The Indian diaspora has a deep, abiding and unconditional commitment to India's welfare. This commitment will get stronger while India continues on its economic path.
Direct Tax Code Bill 2010
The new Indian Direct Tax Code Bill has attempted to put a spanner in this relationship which if implemented in its current form probably will break the nexis for good between India and the NRIs. The DTC Bill proposed to make an NRI liable to pay tax on global income and gains 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 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.
Current Rules
Non-Resident Indian
A non-resident is not liable to tax on income which accrues and is received outside India. Famously known as Non-Resident Indian (NRI) means in others a person of Indian origin living abroad. Depending on his or her period of stay in India will determine the status of a person as a resident or non-resident. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March.
If an individual who satisfies and understands both the conditions of the Income-Tax Act, then he becomes a Non-Resident.
He is not in India for 182 days or more during the relevant previous year. He is not in India for 60 days or more during the previous year and he is not in India for 365 days or more during the 4 years prior to the previous year.
Resident Not Ordinarily Resident (RNOR)
A NRI who has returned to India for good for retirement is covered under the provisions of the Indian Income-Tax Act. He or she is given a special status of Resident but Not Ordinarily Resident (RNOR) if they satisfy one of the following two conditions:
1. He 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.
2. His stay in India during the 7 previous years prior to the previous year under consideration should not be 730
days or more.
year under consideration.
2. His 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 non-resident 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.
New Proposals - Direct Tax Code Bill 2010
The new Direct Taxes Code Bill has proposed 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 of an NRI resides in India for 365 days or more over a four-year period has been retained in the new proposed laws.
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
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.
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.
Additionally, the wealth tax provisions shall also apply to global assets if the person is an Indian resident. The additional assets which have been brought under wealth tax 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). The 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.
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.
The above assets are of particular relevance to non-resident Indians who may now be treated as residents as a significant part of their assets outside India could now be chargeable to wealth tax.
Although the new Indian Direct Tax Code is still not law, we believe despite some verifocus lobbying to come by NRI and interested parties it is likely that the Direct Tax Code Bill shall, subject to amendments and modifications by the Indian Parliament, become Indian tax law. It is hard to see in a global and mobile world why NRI’s would subject them to Indian tax jurisdiction. Some NRI’s may start disposing of the Indian assets such as property and the gradual severance of their link to India. We may be seeing the first signs of decline between India and the infamous Non Resident Indians. We hope to be wrong!
In summary, NRIs should be aware of the provisions of proposed DTC and so as to plan accordingly in advance before it becomes effective on 1 April 2012.
Please note that this Article contain general guidance and information purpose only and do not constitute accountancy, legal or other professional advice. Please speak to your accountant in respect of any tax issues which may arise. We accept no liability for your use of this Article. Legal advice should be obtained on any specific issues.
