3 min read.Updated: 09 Oct 2020, 07:29 AM ISTRenu Yadav
A change in residency status may result in increased tax liability for some NRIs who have been forced to stay on in India and who seek clarifications from the tax department
Non-resident Indians (NRIs) stuck in the country because of the pandemic are seeking clarifications on the tax implications of their stay.
The government has extended a ban on international travel till 31 October. And although limited flights are now being allowed for 16 countries with which India has an ‘air bubble’ agreement, this only started in July, and full-scale commercial flights are yet to resume.
Some NRIs who came to India in FY20 were stuck due to curbs on international flight operations post the covid-19 outbreak since 23 March.
For some, it may result in changes in their residential status to resident Indian for FY21 as their stay may have extended beyond the revised limit of 120 days.
The government came out with a clarification in May exempting the period between 22 March and 31 March for the calculation of residency status for FY20. But no clarification has been issued for FY21 so far.
A change in residency status may result in increased tax liability for some NRIs who have been forced to stay on in India and who seek clarifications from the tax department.
“The government needs to provide clarity. Every taxpayer has to do tax planning and compliance, which includes payment of advance tax, tax deducted at source (TDS), etc. In case of uncertainty about the residential status, taxpayers are finding it difficult to do so. The tax department should come out with a circular as to how it intends to deal with this issue of forced stay in or outside India," said Ved Jain, a former president of the Institute of Chartered Accountants of India (ICAI).
The tax residency of an individual is linked to the physical stay of the person in the country during the financial year. “As per Section 6 of the Income Tax Act, an individual holds out to be a resident in India for FY21 on account of his physical presence in the country for more than 180 days in a financial year, while the threshold is 120 days or more in a financial year along with 365 days or more cumulatively in four preceding years for an Indian citizen or person of Indian origin with total income (excluding income from foreign sources) exceeding ₹15 lakh," said Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP.
Although experts said that not many NRIs are likely to be impacted, clarity from the tax departments would be good. “Even if a person was able to leave after July when the air bubble arrangement started, there is a possibility that he may have stayed in India for 120 days or more. In case a person stays for 120 days or more in India in FY21, they may qualify as a resident but not ordinarily resident in India, and here too, only the income earned or accrued in India may be taxed, unless they are also carrying on a foreign business or profession controlled from India," said Gautam Nayak, a chartered accountant.
In case an NRI qualifies as a resident Indian, the scope of income offered to tax increases.
“Concessional tax rates under double taxation avoidance agreement or for those available for certain incomes may no longer be available, and a disclosure would be required pertaining to the details of foreign asset and liabilities, and various exemptions available to a non-resident will be lost. In effect, it could add an additional tax burden on the NRI. However, taxpayers who would be considered ordinary residents would be particularly hit as their global income would get taxed in India," said Amit Maheshwari, tax partner, AKM Global, a consulting firm.
While exemptions or reliefs related to income can be sought at the time of filing of tax return, the lack of clarity is resulting in issues for people who have to deduct tax on payments to such NRIs.
“In the absence of any such clarification from the tax department, it is difficult for an NRI to furnish any declaration with certainty as to whether he shall qualify as a resident or a non-resident and consequently, it is difficult for the deductor to ascertain as to whether to consider such a person as a resident or a non-resident while deducting taxes, " said Jain. This also raises uncertainty about the rate of tax deducted at source (TDS) as it varies for resident Indians and NRIs.
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