New Delhi: Finance Minister Nirmala Sitharaman on Sunday cleared the confusion about the tax liability of Non-Resident Indians (NRIs) on their global income. “There is no intention to tax global income of NRIs and only income generated in India will be taxed”, the Finance Minister said in a press released.

The clarification comes after the Finance Bill, 2020 has proposed that an Indian citizen shall be deemed to be resident in India, if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India, the release read.

“The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct,” it said.

In order to avoid any misinterpretation, 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, it added.

“What we are doing now is that the income of an NRI generated in India will be taxed here. If he’s earning something in a jurisdiction where there is no tax, why will I include that into mine that has been generated there. Whereas if you have a property here and you have a rent out of it, but because you are living there, you carry this rent into your income there and pay no tax there, pay no tax here … since the property is in India, I have got a sovereign right to tax,” she further said in a post Budget interaction with media”, the Finance Minister elaborated.

Later the Narendra Modi-led government presented a ‘tie-breaker’ rule in connection with the global income of the NRI. Besides, it also gave various examples for better understanding of the proposal.

“Suppose there is an Indian citizen who stays in UAE. As per UAE law, if a person stays there for 183 days or more in a calendar year, he becomes resident of UAE. If under Sub-section (1A), he also becomes resident in India. It becomes a case of tie-breaker. The tie-breaker rule is applied in accordance with Article 4 of India UAE DTAA”, said the government.

The first rule is where does this person have a permanent home. If he has a permanent home in UAE only, the tie-breaker test is resolved in favour of him being a resident of UAE.

If he has a permanent home in both the UAE and India, we go to the second test, which is the centre of vital interest being personal and economic relation. If a person is employed only in UAE or has business establishment only in the UAE or has a source of income only in the UAE, then his economic relation would only lie in the UAE. Under such a scenario, he would become a resident of the UAE.

If he has personal and economic relation both in India and in UAE, the next tie-breaker test is where does he habitually abode (reside). Habitually abode criteria is decided based on period of time one stay in a country. If a person actually resides only in the UAE and occasionally visits India, he would be resident of the UAE, says the government further.

Thus, the following scenario would illustrate this tie-breaker rule:

1) An Indian citizen has permanent home only in India and he starts staying in the UAE to avoid payment of tax in India. In this case, he would be resident in India and would be liable to tax in India on global income.

2) An Indian citizen has a permanent home in India and personal and economic relation as well only in India and to avoid payment of taxes in India he starts staying in India. He also buys a house in UAE but personal and economic relation remains in India. In this case, he would be resident in India and would be liable to tax in India on global income.

3) On the other hand, if an Indian citizen has permanent home only in UAE he would be resident in UAE and would not be hit by this new provision.

4) Further, if he has a permanent home in both India and the UAE but personal and economic interest only in the UAE. For example, he is having employment or business establishment or source of income only in the UAE. In this case, he will be a resident of the UAE and would not be hit by this new provision.

5) In another situation, if Indian citizen has a permanent home as well as personal and economic interest both in India and the UAE and if he stays in the UAE regularly and occasionally visits India, his place of habitual abode would be in UAE and he would be resident of the UAE and would not be hit by this provision.

“Thus, an Indian citizen who is having a permanent home in UAE and have his employment or business in UAE and most of the time stay in UAE would not be hit by this provision and would remain resident of UAE,” says the government.

(With agency inputs)