BEWARE NON RESIDENT INDIANS—INCOME TAX PITFALLS BACK HOME
Imagine this real-life situation. You are working in the Gulf for the last eight years, and your employer decides to terminate your employment during the year-end break, and you return to India on 31st December 2017.
In India, the number of days counted with reference to Indian tax year starts April 1st and ends on March 31st of the subsequent year. In above example, you completed 275 days during the financial year 2017-18 and returned to India.
There is a general perception that if you spend more than 183 days outside India, you are not a resident of India hence you are NRI. Is that right? Wrong.
In a recent case decided by the AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), New Delhi on the application of Mrs. Smita Anand, China it was held that a person who resigned from the services of the company is not eligible to be called an NRI on “visit to India” and thus was held to be a resident of India. She was made to pay tax on her entire earnings of that year in China.
What is the Income Tax law provision on defining who is resident of India?
As per Section 6 of Income Tax Act, 1961, For the purposes of Income Tax Act,—
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
[Explanation. 1]—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year [as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted;
The analysis of above Income tax provision is as follows:
You are resident of India if your stay in India in a particular financial year is (i) More than 182 days or (ii) 365 days in past 4 years and more than 60 days in that year.
However Indian passport holder has certain preferable treatment by way of special provisions on the number of days of stay in India.
If you are Indian passport holder and leave during the year for employment, you can claim NRI status if you stay outside India for more than 183 days.
In another case, if you are staying abroad (example housewife, student) and visit India temporarily only to enjoy holidays, meet family and friends and stay in India for less than 182 during such visits you are still treated as NRI even if you have not left for employment.
However, it should be kept in mind that if your Resident /Employment Pass is cancelled before the end of the financial year and you return to India you may have Income Tax liability and must seek tax advice to see if there is tax liability based on your unique case.
The second significant concern involves people who leave India for business abroad and conduct proprietary business in their own name. In short, they are self-employed.
In one case, Income tax authorities took the view that self-employment is not employment and this favorable rule of 183 days is not applicable to such Indian passport holders. Kerala High Court while ruling in favor of one Mr. Abdul Razzak, NRI took the view that business or self -employment is also employment and is thus such Indian citizen is eligible for the benefit of Explanation (a) of Section 6 (c).
The third issue is if you are merely holding a tourist visa and spend more than 183 days outside, there are preferential rules for counting the number of days and claiming NRI status.
I came across the case decided by Madras High court of Gold smuggler. Apparasu Ravi who was caught at Chennai Airport with 10 Kg gold. Court claimed that since he held only a visitor visa of Singapore he can’t take benefit of Explanation (a) or (b) of Section 6 (c). So, although he spent about 270 days outside India, he was held to be resident of India.
The fourth question is can you take your foreign salary in your Indian NRE account?
There has been a number of litigations in Indian courts where various high courts decided that taxability of salary depends on where service were performed. For example, in case of seafarers, it is normal for them to receive salaries for their shipping employment in Indian NRE accounts as they work on ships and return to India after finishing their assignment. They usually don’t have base abroad except for their ship.
Recently, Central Board of Direct Taxes (CBDT) finally settled the issue saying seafarers can receive their salaries in NRE account and still claim NRI benefits if they are out of India for more than 182 days.
Keep in mind the following things if you wish to have your Non-resident Indian (NRI) status:
1. Stay in a foreign country on employment or resident Visa for more than 183 days. And don’t count day of departure and arrival in foreign stay.
2. Maintain original documents of foreign employment.
3. Keep notarised copies of your passport stampings and do this exercise at the end of every year.
4. India UAE has Double Tax avoidance agreement and thus if you are staying in UAE for more than 182 days apply for Tax domicile certificate from Ministry of Finance , UAE ( https://www.mof.gov.ae/en/mservices/Individual/VtAx/Pages/tax.aspx). This may save you from long drawn litigation in India.
5. Indian Income Tax Dept is highly litigant dept and has one of the highest backlog of pending cases in Indian courts. It has clogged the Indian courts with mindless litigations. Tax officers have no accountability and are not answerable for bad decisions and thus infamous for “Tax Terrorism”. They are usually insensitive and non-courteous to the taxpayers.
6. Litigations are painful, long drawn and very expensive and thus it is good idea to seek tax opinion if you have large income as NRI.
India has a long tradition of intellectual Argumentativeness. Nobel Prize-winning Indian economist Amartya Sen analyzed this in his famous book The Argumentative Indian. Indian tax authorities have taken it too seriously and stretched at the point of break.
While as proud Indians we may like paying “just” taxes but mindless litigation is a byproduct of this noble activity of collecting taxes for social good.
And as Non-resident Indians (NRIs) we should be mindful of the unknown and uncertain liabilities.
Vinod Ramchandra Jadhav is a Dubai based Businessman and promoter of SAVA Group (www.savaglobal.com). He is not a tax expert, but as an entrepreneur, he has learned much about income tax litigation from his business experiences in Pune, India.