What the Union Budget 2020 means for non-resident Indians

New tax rules around non-resident Indians (NRIs) laid down by the Finance Ministry have their pros and cons, according to senior consulting and tax advisory executives. NRIs will not be taxed on their foreign income, but will be subject to a new threshold for physical presence in India.

Some NRIs had cause for concern after an announcement in the Union Budget that “an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.” Interpretations of the proposal suggested that even non-resident Indians in non-income-tax markets such as the United Arab Emirates (UAE) would not be liable in India.

Nevertheless, the proposal is a measure to prevent tax evasion by NRIs, and the Finance Ministry has made this clear in a new statement. The ministry has given assurance that NRIs in the UAE and other Middle Eastern markets will not be liable under the new law, as it is not aimed at bonafide NRIs.

Director at Nangia Andersen Consulting Shailesh Kumar has lauded the valuable clarification, explaining its implications. “With this clarification, it is clear that new residency provisions are applicable only for NRIs arranging their affairs for tax avoidance and will not impact bonafide workers/ employees,” he said.

“It has also been clarified that even in such cases, only income from Indian business or profession of such 'stateless Indian citizens' will be taxed and not global income,” he added. The new provisions are aimed, instead, at cases of tax evasion, as the government looks to drive up its tax collection levels.

A significant corporate tax cut introduced by the government is likely to affect revenue collection, driving the government to tighten its collection mechanisms in other departments so as to minimise the strain on public coffers. This is not the only new provision with respect to NRIs.

Previously, individuals had to be outside the country for 120 days to classify as NRIs. This period has now been doubled to 240 days, so as to increase the number of people under tax liability. According to Partner at Deloitte Shefali Goradia, this change might have unwanted repercussions.

“Reducing the threshold of physical presence (in India) to 120 days in a year will make visiting NRIs more conscious of their travel dates. On one hand, the Government has been keen to attract talent and onshore the funds and fund managers, whereas on the other hand, this move will disincentivise people from spending more time in India. Businesses are mobile and with a view to attract entrepreneurs to India, the Finance Minister should consider restoring the prior threshold,” she said.