INDIA: NRIs reeling after temporary tax residency reliefs vanish.

As published on international-adviser.com, Wednesday 10 March, 2021.

Non-resident Indians, who lost their NRI status because of an involuntary overstay in India during the long lockdown, are in for a rude shock.

Despite being granted a temporary relief by the country’s supreme court, the government has refused to grant a general relaxation that would keep them from falling into India’s domestic tax net.

Instead, India’s top tax authority, the Central Board of Direct Taxes (CBDT), said in a circular that no exemption for a forced stay in India due to the pandemic can be given.

This is because the sole purpose of the government is to ensure that a person does not escape paying tax by being a non-resident in India and his host country.

CBDT issued the circular on 3 March 2021; clarifying the tax residency status for the 2020-21 financial year of those who had to stay on in India during the pandemic.

The clarification increases the potential tax exposure of NRIs, as well as compliance obligations under India’s tax laws.

An NRI from the UAE had petitioned India’s supreme court to direct the tax authorities to allow exemption during the pandemic period.

The court duly directed CBDT to decide within three weeks on reliefs to be granted to NRIs on the payment of income tax for the financial year 2020-21.

The petitioner had gone to India in March 2020 on a visit and could not travel back after 120 days in India.

This involuntary extended stay resulted in him losing his NRI status under the Income Tax Act, 1961, thereby exposing his global income to tax in India.

The tax body, which reiterated the existing regulations, was noncommittal and refrained from providing the relief the NRIs sought.

The clarification surprised everyone as it provides that the period of stay in India during 2020-21 financial year will be counted for determining the tax-residency status in India.

CBDT has asked NRIs who may experience double taxation in the present financial year to file representation in a prescribed form by 31 March 2021.

NRIs are now required to determine their global tax liabilities on or before 31 March 2021; as the deadline to seek relief from double taxation on such global income expires on that day.

The affected NRIs will either have to challenge the court or the notification from CBDT which gave no relief to NRIs who, having overstayed in India due to the pandemic, now fear that their overseas earnings would be taxed.

“NRIs from the UAE may not have the option to make a representation to the government who had to involuntarily reside in India for a period of more than 182 days and whose complaint may not be related to ‘double taxation’ but to ‘taxation of income in India’ which otherwise would not have been taxed at all on account of the tax neutral nature of UAE,” said Benoy Sasi, international lawyer at DIFC Courts.

The circular clarified that there would be no double taxation and the determination of residence shall be done on the basis of relevant double taxation avoidance agreement.

The UAE is a signatory to the DTA with India.

Residency status is determined by the duration of physical presence in the country: a person is considered resident if the period of stay in India is 182 days or more; or, if the person has more than INR1.5m (£14,798, $20,527, €17,274) domestic income and stays for 120 days or more.

Unlike a resident whose global income is taxed, NRIs have to pay tax on income earned in India but not on income earned outside India.

So, most NRIs plan their visit and duration of stay in India to meet the residency condition and avoid paying tax in India on what they earn outside India.