Budget 2020: Impact of Budget vis-a-vis Budget of Impact, NRIs Happy or Unhappy?

Budget was presented by the Finance Minister under the leadership of Prime Minister Narendra Modi led NDA government by Nirmala Sitharaman on 1st February 2020 saying that the budget is in line with achieving 5 trillion dollar economy by 2025.

Considering tax revenue collection from NRIs and wrong mechanism being used by High Networth Individuals by evading taxes by not being residents of any country, Budget 2020 has laid the foundation to tax NRIs who are not liable to pay tax anywhere, rather in other words, where they are not citizens as well. A couple of wrongs or misunderstood articles to grab attention took NRI community taken away specially being in UAE. There is a big difference between Non Resident Indian (NRI) in UAE and NRI in any other part of the world. Difference is to getting citizenship, unless in counties like the US, UK, Australia or Singapore where staying for a particular period of time gives you citizenship. It’s certain for people in the UAE to travel back to India for good post retirement.

Assuming the interpretation in another way, it was misunderstood to include NRIs in Gulf who eventually don’t get citizenship as per the rules of the country and get residence permits only will have to pay taxes in India on foreign income just because of there is no direct tax in UAE. The department came out with NRI taxation clarification, saying “It is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession,” the Central Board of Direct Taxes (CBDT) said in a statement on Sunday. “The new provision is not intended to include in tax net those Indian citizens who are bona fide workers in other countries.”

The words of the budget document read that it’s possible for an individual to arrange his affairs in a manner where he is not liable to tax in any country or jurisdiction during the year, clearing the air as regards NRI taxation. This issue bothers majorly in countries around the world. Being an Indian Citizen and taking foreign country residency to claim NRI status and thus avoid taxation liability bothers because the world countries are taking efforts for double taxation avoidance agreements are being written to stop the problem.

Indians who are able to evade tax by planning their travel across multiple countries would be impacted by the proposed amendment affecting the NRI tax rules. Such NRIs would not be able to completely escape taxation anywhere in the world now.

The government has also lowered the threshold for being deemed a resident of the country to 120 days from 180 days in a year for Indian citizens or persons of Indian origin. Consequently, anyone who stays in India for 120 days or more in a financial year will now be deemed as a resident liable to pay tax. This changes the dynamics of NRI tax rules, NRI taxation and NRI tax filing. The earlier noon was 182 days. The whole agenda is to tighten the noose around those planning for tax evasions by calculating their number of days to be stayed outside India. It’s now very important for bonafide NRIs to be careful as to number of days travel to India to define there NRI status.
This amendment will come in force from the FY 2020-21 and might bring about a change in NRI tax rules, NRI taxation and NRI tax filing.

CA Ajay Vaswani, NRI Tax Expert was one of the quick ones to issue the clarification that bonafide workers living in countries where there is no taxation system will not have an impact of this amendment.

Taking the write up now on point by point changes made in the budget, from NRIs perspective

1. Definition of Resident and Non Resident:

Number of days increased from 182 days now to 240 days. So if now an individual who stays outside India for more than 240 days cumulative in the preceding previous year becomes Non Resident India.

2. Resident but Not Ordinary Resident:

The earlier conditions were:
If you have been an NRI in 9 out of 10 financial years preceding the year.
OR
You have during the 7 financial years preceding the year been in India for a period of 729 days or less.

Now it has been changed to only one condition, which reads as:
If you have been an NRI in 7 out of 10 financial years preceding the year.
RNOR status is beneficial for those people who are NRI and are going back to India for good. Their Indian income is only taxable in such cases and foreign income is not taxed for over a period of next 2 financial years

3. Removal of Dividend Distribution Tax (DDT)

The Clamour for removal of DDT had been on for a while due to cascading taxation. India was levying a total of 20.56 percent DDT on a company declaring dividends. This is over and above the corporate tax that companies pay on their taxable profit. The decision is likely to benefit small as well as non-resident taxpayers. Also doing away with this tax can give a major push to investment.
Under the present scenario, Domestic companies are required to pay DDT on dividends distributed to the investors and such dividend is exempt in the hands of investors under Section 10(34) of the Act. But if such dividend income exceeds Rs. 10 Lakhs then the receiver is required to pay tax at the rate of 10% on such dividend income. Under the proposed amendment, such Dividend will no longer be brought to tax under DDT and now it will be taxed in the hands of the receiver as per their applicable tax rate. However, if the receiver has incurred any interest expense in order to earn such dividend than the deduction of interest will be allowed as deduction u/s 57 of the Act which will not, in any case, go beyond 20% of the Dividend earned. Further Company distributing Dividend now required to deduct TDS at the rate of 10% if such dividend payment exceeds Rs. 5000/-.

4. Changes in Tax Rate Slabs:

The Income-tax slab rates applicable under the new tax regime would be:

Total income (Rs)Simplified Tax Rate
Up to Rs 2.5 lakhNil
Rs 2,50,001 to 5,00,0005%
Rs 5,00,001 to 7,50,00110%
Rs 7,50,0001 to 10,00,00015%
Rs 10,00,001 to 12,50,00020%
Rs 12, 50,001 to 15,00,00025%
Above Rs 15,00,00030%

The new slab rates are optional and you need to forego deductions to avail the benefit. Individuals who would prefer to have deductions claimed can opt for the old scheme as well. Cess and surcharge on income tax payable in the new proposed personal tax regime remain the same as in the existing tax regime. The slab rates benefits are not available to Non-Resident Indians and the income up to Rs 2.50 lacs will be exempt for all be it super or super senior citizen.

5. Gift from Non Relative:

A Non Resident Indian receiving a gift from Non Blood Relative exceeding Rs 50,000 in a financial year will now be taxable as part of his total income. He will be liable to NRI tax. How this is relevant can be understood by an example as follows: Your friend from India comes to Dubai and needs AED for shopping saying will return in India equivalent in rupees. The moment it’s done it becomes now part of your income because this transaction is not going to be settled in the future as it’s already done.

The changes being made are to make rules friendly and compliance easy. It’s been a challenging situation.

Disclaimer: The contents of the document are solely for information purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Comments on misinterpretation and mistakes are wholeheartedly invited. For more, please connect at ca.ajayvaswani@gmail.com

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