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The withdrawal of NOR status, as proposed in the budget is likely to cause serious hardship to NRI's. By an innocuous looking amendment to Section 6, the status of NOR is proposed to be withdrawn. Surprisingly the speech of the Finance Minister does not even refer to this amendment.
The memorandum explaining the provisions of the Bill gives the following justification of withdrawal:
Clause 6 of the Income Tax Act provides for the status of 'not ordinary resident'. The income accruing or arising outside India to a person 'not ordinary resident' in India is ordinarily exempt from tax.
The status of 'not ordinary resident' was introduced in the Income Tax Act in 1938 in order to, inter alia, provide relief to European officials in the initial years of their stay in India. However the status has far outlived its utility.
The Bill, therefore, seeks to omit clause (6) of section 6.
On a plain reading of this explanation one may infer that it is just the repeal of a redundant section. However, this is likely to have very serious effects for the NRI's. If the amendment goes through, the individuals who stay in India for more than 182 days in a year will be in trouble, as their income earned not only in India, but anywhere in the world would become taxable in India! As per the existing provisions, an NOR is entitled to enjoy this status for a period of nine years, without paying any tax on income earned abroad. So if you are an NRI and want to come home for setting up some business or for meeting your family and friends, take care that you should not stay for more than 182 days, otherwise the Income Tax Department will start calculating tax on your income abroad also. Don't be too proud of the PIO (Person of Indian Origin) that has been promised to you. The message seems to be clear: we want NRI money but not NRI's!
Analysis of the Provision
- After the withdrawal of the provision the taxability of the income of a person not resident in India who stays in India for more than 182 days would depend upon the tax treaty between the two countries, because it is a well settled law that where a matter is governed by both tax treaty and the Act, the assessee may at his option adopt that position which is more favourable to him. The tax Treaties with each country where the non-resident has sources of income will have to be examined. This is not only confusing but would lead to a great deal of confusion and consequent litigation. I have examined the Tax Treaty that India has signed with most countries, and found that even where the Treaty exists, the position is far from clear, and in many cases, despite the Treaty, the income will be taxed in India, also.
- If the Bill is passed, the Global income of foreign nationals who stay in India for more than 182 days will become taxable in many cases where there is no Treaty or where the Treaty is silent about this contingency. Is it not ridiculous! For example, the global income of a Singapore national or an Italy national will now become taxable in India. He will have to pay a heavy price for staying in India.
- As if this were not enough, in most of these cases, there will be double taxation on the income, it being put to tax in the country where it has originated and also in India.
- The situation of an Indian who has gone for employment to a country where there are no taxes (e.g. UAE) and who visits to India will be even more precarious. If his Indian visit extends to 182 days or more, he would be considered a resident and the tax-free income that he has earned abroad becomes taxable in India.
- No protection would be available for people
earning income in countries like Hong Kong and Ireland, which do not
have the Treaty with India.
NOR tax benefits restored
Congratulations NRI's your plea is accepted. The finance minister has completely rolled back the budget proposal changing the tax status of Not Ordinarily Resident (NOR). All the tax benefits which were being enjoyed by NOR's earlier have now been restored.
You will recall that mahesh.com was the first site which carried an in-depth analysis of the provision and explained how dreadful it will be for the NRI's {read this page for details}. We also requested all of you to lodge a protest with the Finance Minister in the suggested format. Protest started pouring in and the Finance Minister admitted in Parliament of having received several representations from you all. The provision stands withdrawn and all benefits being given earlier have been restored. Kudos to you all. We can if we believe we can!
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