India’s new rules to tax “stateless” NRIs lack clarity and may hit investments

Crackdown on NRI tax evaders.
Crackdown on NRI tax evaders.
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India is tightening the noose around non-resident Indians (NRIs) who exploit the country’s residency norms to avoid paying taxes.

In her annual budget presented on Feb. 1, finance minister Nirmala Sitharaman increased the number of days a person must be away from the country to qualify as an “NRI.” Consequently, anyone who stays in the country for 120 days or more in a year will now be deemed as a resident liable to pay tax. The earlier norm was 182 days.

The government is targeting those who maintain a “stateless” status through small stays in various countries. “The new residency provisions signal a distinct policy shift in the government’s approach towards NRIs. It is making it difficult for frequent travellers to avoid paying taxes back home,” said Archit Gupta, founder and CEO of online tax platform ClearTax.

Due to the changes, many NRIs stand to lose their status. “NRIs will need to carefully plan visits/stays in India to avoid triggering residence status, clearly leaving less leeway for overstays,” said Srivatsan Lakshminarayan, professor at SP Jain Institute of Management and Research, a Mumbai-based management school.

The new provisions will also see some high-net worth individuals coming under the tax purview. However, there are drawbacks.

Impact on investments

The finance bill (pdf) introduced by Sitharaman also deemed residential status on NRIs not paying tax in any jurisdiction, irrespective of their stay in India. “It is proposed to provide that an Indian citizen who is not liable to tax anywhere would be deemed to be a resident of India (pdf),” said Sitharaman in her budget speech.

This provision could have far-reaching impacts, claim experts.

NRIs may start liquidating their existing assets in the country, and move to places with no or lower tax liabilities. “This may result in disinvestments by NRIs from the Indian market as the taxes in India are high compared to other jurisdictions,” said Sameer Mittal, managing partner with Delhi-based firm Sameer Mittal and Associates.

Besides, there is lack of clarity on the new norms.

Grey areas

A day after the budget, Sitharaman clarified that under the new provisions the government is not going to tax overseas incomes of Indians, even as it deems such non-tax paying individuals as residents.

However, doubts remain over this. “The communiqué from the finance ministry mentioned that only NRIs income earned in India will be taxed. This, however, does not seem to be coming from contents of the finance bill. I assume that the finance bill will be amended to accommodate this change at time of its passing by the parliament,” said Amit Singhania, partner at New Delhi-based law firm, Shardul Amarchand Mangaldas.

The ambiguity is likely to result in tax grievances. 

“The new residency provisions and their tax implications are subject to interpretation. In light of the aggressive position adopted by authorities, honest tax payers could be impacted in case of misinterpretation,” said Rohit Jain, tax policy expert and partner at Mumbai-based law firm, Economic Law Practice.

Meanwhile, there are those who say honest NRI taxpayers will not be hurt. “New provisions will only apply to a very small number of NRIs, who are living or working in tax havens like the UAE, Bahamas, or Ireland. It will impact shell companies as well,” said Manish Chhabra, an NRI, and CEO and founder of Shifa Care, an online healthcare platform. “In my case even if I earn money in India, I will be paying tax in Australia on overseas income.”