Has Direct Tax Code Short Changed The NRI

Continuing from my previous write-up on “NRI the forgoten Hero”, I had many of our NRI readers asking me the implications of Direct Tax Code (DTC) on the NRI status. I will try to clear their apprehensions about sections in the DTC which are being perceived as NRI unfriendly. The DTC takes efect April 2012.

Residential status

Tax implication for an assessee depends on his residential status as per Indian Income Tax Act 1961. In the case of Indian citizen, whether an income accrued to such a person outside India, is taxable in India depends upon the residential status of the person in India. Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India depends on the residential status of the individual, rather than on his citizenship. Therefore, determining correctly the residential status of a person is very signifcant in order to fnd out an individual’s tax liability. DTC has brought in changes in defnition to determine “residential status”.

Test for residency of individuals

The residency test for individuals in India is usually based on either physical presence in the country or facts and circumstances that prove residence in a country or a combination of both. In many cases this test may be satisfed by being physically present in a country for a prescribed period of time. Let me try to explain how residency will be determined under the DTC and how it is diferent from present defnition under Income Tax Act 1961.

Under the DTC the residential status of an individual in an assessment year will continue to be determined on the basis of his stay in India during the previous year and the earlier years. Individual will be treated as resident of India for an assessment year based on either of the following conditions:-

a. Only if they stay for 182 days or more in India in the previous year

b. Stay in India should be 60 days or more in the previous year and 365 days or more during the 4 years immediately preceeding the previous year.

This stay need not be continuous. Taxman may examine the passport data for verifcation. The number of days of stay in each year may be summarized and tested for the above conditions.
I have tried to explain through the residential status for assessment year 2011-2012 under the proposed DTC for various scenarios:

Case	Stay in India previous year 2010- 2011	Stay in India in 4 years preceding the previous year	Residential status	Remarks
Case 1	215 days	Not applicable	Resident	Stay is more than 182 days in India
Case 2	115 days		Cannot be decided by condition ‘a’ alone	Since stay is less than 182 days , condition ‘a’ not satisfed, hence check for condition ‘b’
	115 days	375 days	Resident	Since stay in preceding 4 years is more than 365.
Case 3	115 days		Cannot be decided by condition ‘a’ alone	Since stay is less than 182 days , condition ‘a’ not satisfed, hence check for condition ‘b’
	115 days	360 days	Non resident	Since stay in preceding 4 years is less than 365 days
Case 4	30 days		Cannot be decided by condition ‘a’ alone	Since stay is less than 182 days , condition ‘a’ not satisfed, hence check for condition ‘b’

As per the DTC proposal, an NRI will be deemed as resident only if he has also stayed in India for 365 days or more in the preceeding four years, together with 60 days in the previous year. As per DTC and the Income Tax Act 1961, a resident is taxed for global income.

However under the DTC resident is also given exemption for tax under global income which is discussed in detail under the section ‘taxing global income’. I do not see a major shif in the DTC with respect to tax on global income compared to existing Income tax act. The major shif in the DTC is the deletion of the RNOR status which I have discussed in detail in the section on ‘RNOR’

Resident But Not Ordinarily Resident (RNOR)

An NRI who has returned to India for good is covered under the provisions of the Income-Tax Act 1961. He is given a special status of Resident but Not Ordinarily Resident (RNOR) for two years if he satisfes one of the following two conditions

He is not a resident, as per the provision of Income Tax Act 1961, for at least 9 out of 10 years prior to the previous year under consideration or
His stay in India during the 7 years prior to the previous year under consideration should not be 730 days or more.

As a RNOR one could enjoy tax benefts that were being available as NRI besides foreign income being tax free. Till the year 2004, NRI enjoyed 9 years of RNOR status afer returning to India. By amendment in 2004 the RNOR period was reduced to 2 years. Under the DTC it is proposed to remove RNOR category. Afer implementation of DTC 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 exceeded for the purpose of computing tax. However exemption will be available for taxing global income which is discussed in the section ‘taxing global income’.

Taxing global income

The new direct taxes code could bring a large number of global Indians under the tax net as it does away with a provision that allowed individuals to escape tax in any country citing double tax avoidance. The DTC has only atempted to clean up the provision in line with the laws globally.

Under the DTC, if an NRI becomes a resident in any fnancial year, his global income does not immediately become liable to tax in India. Global income would become taxable only if the person also stayed in India for nine out of 10 precedent years, or 730 days in the preceding seven years.

Accordingly on an average if a person does not stay in India in the year on year over 104 days (approximately 3 ½ months) his global income will not be taxed in India.

Taxing capital gains

The distinction between long term capital assets and short term capital assets has been given up in the DTC. I shall be discussing about ‘Taxing capital gains’ in the next issue.

Conclusion

To conclude DTC has tried to make tax computation simpler for both resident and non resident Indian. The change in defnition of ‘Residence’ will not increase the tax liability of genuine NRI who goes to India for holiday for say two or three months in a year. It only tries to plug loopholes that were being exploited by active resident business men and corporates taking NRI route to avoid taxes.

However the removal of RNOR status is a bit harsh for those Indians who would like to return to India to setup a project. The two year interim status of RNOR was an appropriate duration for the returning Indian to study local business environment before deciding his investment decision. Removal of RNOR can have impact on such likely investments in the long run thereby hurting NRI investment into Indian business.

The DTC also is a good atempt by the fnance minister to align Indian Direct Tax regime with taxation laws prevalent in the US and Western World.

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