India waters down tax residency reforms

Monday, 30 March 2020
Proposals in India's 2020 federal budget to significantly extend the tax residency rules have been diluted in the final version of Finance Act 2020.

Under the original proposals, non-resident Indians and persons of Indian origin would be deemed tax-resident if they are in India for only 120 days in the relevant year, rather than 180 days, with effect from 1 April 2020. Indian citizens who are not tax-resident in any other jurisdiction would also be deemed Indian tax residents if they receive income from a business or profession in India, thereby bringing their worldwide income into India's tax net.

These measures caused jitters among wealthy non-resident Indians (NRI) and persons of Indian origin (PIO), says law form Withers. Significant changes have been made to the new residency tests in the final bill, which was approved by parliament on 23 March.

The new 120-day deemed residency rule will still be brought in, but will only apply to those with income from Indian sources above INR1.5 million, if they have spent a total of 365 days in India in the last four years as well as 120 days in the current year. Such people will be liable to Indian income tax on their worldwide dividends at 43 per cent. Individuals earning less than INR1.5 million (excluding foreign-source income) will continue to be subject to the earlier 182-day residency regime, and will be taxed only on income sourced in India or foreign-source income derived from a business controlled in India. They are not required to disclose overseas trusts, bank accounts or financial interests.

The proposal to deem Indian citizens as Indian tax resident if they are not liable to tax in any other country, regardless of whether such individual meets the residency test laid out above, has also been dropped.

However, says Withers, a 'resident but not ordinarily resident' (RNOR) person in this position may still be viewed as a resident for the purpose of automatic information exchange with India under the Common Reporting Standard. Also, a RNOR who exercises control over companies and trusts outside India may create Indian tax residency risks for the overseas entities. There is also a risk that foreign-source income of an RNOR may be taxed on the basis that s/he controls the overseas entities that distribute the income.

The 43 per cent tax rate in India for individuals has pushed several wealthy families and entrepreneurs to become non-residents and consolidate investment holdings outside India, according to Withers. The overhaul of India's dividend tax regime in other parts of the 2020 Budget may prompt business owners to take out significant cash trapped in their Indian companies, it says.

Sources

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