The new definition of Non-resident

The new definition of Non-resident

and other amendments under the Indian Finance Bill 2020

India is now the fifth largest economy of the world as per the World Economic Forum’s latest report. Based on the nominal GDP ranking, India has surpassed both France and UK. Despite the leap in GDP ranking in past years, there are still a lot of challenges in front of Indian economy. Even though the government has been introducing reforms, black money still is one of the biggest issue in Indian economy. The latest in this series of reforms has been introduced in Indian Finance Bill 2020.

The Finance Bill proposes 105 amendments and the budget speech given by Finance Minister Nirmala Seetaraman was one of the longest in the recent years. The effect of proposed amendments is even being felt outside India with the change in the definition of ‘Resident’ and ‘Non-Resident’.

The first strong implication of these changes is that Non-residents now need to plan ahead their India trip to avoid tax liability in India. The period of calculating residential status for taxation purposes has now been reduced from 182 days to 120 days. That means a person who stays in India for less than 120 days in a financial year will only be considered Non-resident. Staying in India for 120 days or more will attract compliance with all the provisions of Income Tax Act as Resident, including return filing, TDS, tax payment, etc. Further, they also need to give account of all their foreign income, assets and so. Any genuine non-resident just need to be mindful of these provisions which are set as trap for persons who avoid paying taxes in India or elsewhere by being Non-resident Indian citizens.

Further, the definition of ‘not ordinarily resident’ has also been changed. Now, a person will be ‘not ordinarily resident’ if he is a non-resident in 7 out of 10 preceding years. Another significant implication is an Indian Citizen not liable to pay tax in any other country shall be deemed to be resident of India. This will bring in many tax evaders under the tax net, who have long abused the gaps in tax laws of different countries in the name of tax planning. The CBDT has issued a clarification providing some relief that a person becoming resident under Section 6(1A) is required to pay tax only on income derived from Indian business or profession and not on foreign income.

High net-worth individuals might also feel the pinch of removal of dividend distribution tax. The dividends will be taxed at higher rate in the hands of these people as compared to dividend tax.

Now comes the good part for Non-residents. An exemption has been granted for filing income tax return to Non-residents. If the total income consists of royalty or fee for technical services and TDS has been deducted on the same, then non-resident is not required to file the income tax return in India. Previously, the exemption was allowed only if the income included only dividend or interest income from India on which TDS has been deducted.

For fast and easy resolution of disputes, the option to go to DRP (Dispute Resolution Panel) for mediation purposes has now been extended to Non-residents. Earlier only foreign companies could go to DRP (Dispute Resolution Panel).

The amendments might be creating waves in social media but eventually will come back shore with a fair amount of tax to boost economy and curb the tax evasion practices.

Ankur Chaplot

CPA(Aus), CA (India)

Disclaimer: The material and information contained in the article is for general information purpose only. The author is not liable for any errors, omissions or the result of actions from the use of the information. The readers are advised to seek professional advice regarding their case and circumstances before acting on the above information.