World economies in the West are under pressure. Governments are looking at avenues to collect higher taxes. For example, the US is considering taxing its richer more. The eastern side of the world is growing but not at a pace at which it was growing in the past few years. However, there are plenty of opportunities which the eastern part of the world has to offer both in terms of investments as well as employment. Non-resident Indians (NRIs) have been investing in India and many of them are even moving into India. In this article, let us focus on some of the changes in tax laws which are in store for NRIs in times to come.
The direct taxes code (DTC), a new tax regime, has been a matter of debate for quite some time. It is expected that DTC may come into play from 1 April 2012. There have been changes proposed in DTC which may impact NRIs.
Under the existing provisions, an individual becomes resident of India if his/her stay in India is 182 days or more during a tax year (182 days condition) or 60 days during the tax year and 365 days in the past four tax years (60 days condition). An individual who does not fulfil the above conditions qualifies to become a non resident (NR).
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Further, a resident individual becomes a resident and ordinarily resident (ROR) of India, if his/her stay in India is 730 days or more in the past seven tax years and qualifies to be a resident of India for at least two tax years out of the past 10 tax years preceding the relevant tax year. An individual who does not fulfil either or both the above conditions qualify to be a resident but not ordinarily resident (RNOR) of India.
NR/RNORs are taxable in India on India-sourced income or income received in India, but RORs are taxable in India on their global income.
At present, individuals of Indian nationality or origin, who are settled abroad, have been given a significant advantage in determining their residency in India (as the 60 days condition is not applicable in their case so that they can visit India to take care of their investments in India and family). The beneficial provision of testing only the 182 days condition of residency in the case of an Indian citizen or person of Indian origin who comes on visit is missing in the proposed DTC. Such individuals would become a resident sooner than later. This may result in such individuals ending up paying taxes on their global income in India, where they become ROR. India has a tax treaty with a number of countries and relief from double taxation may be available where the NRI is from a country with which India has a treaty.
Under the current provisions, if an individual is not an Indian citizen, there is no wealth tax payable on the assets situated outside India. However, the situation would not remain the same after DTC comes into place. Under DTC, RORs are proposed to be taxed on their wealth situated anywhere in the world, irrespective of whether such individuals are citizens of India or not. Though the taxable wealth exemption limit is proposed to be enhanced from Rs 30 lakh to Rs 1 crore under DTC, but the definition of taxable wealth has also been proposed to be expanded.
The rate of wealth tax is 1% on net wealth exceeding Rs 1 crore. There are many countries where wealth tax levy is not there. Many of the tax treaties do not cover wealth tax. In such cases, there is going to be additional burden for those NRIs who are holding foreign citizenships, when they become ROR.
One really needs to wait and see the final print of DTC when implemented. In case DTC comes into effect with the currently proposed provisions, NRIs need to keep a closer watch on their travel calendar. They need to plan their travel to India in a manner that they do not become ROR.
Kuldip Kumar is executive director (tax and regulatory services), PricewaterhouseCoopers Pvt. Ltd.