INDIA: Government could look at increasing cut off days for residency.

As published on economictimes.indiatimes.com, Friday 28 January, 2022.

The government could look at increasing the cut-off days for non-resident Indians (NRIs) to determine their residency status and tax their global income domestically in a bid to stop the flow of rich Indians to other countries.

The cut-off was reduced to 120 days from 183 days earlier to determine their residency status.

Tax experts said this has backfired as many rich Indians would rather take up citizenship elsewhere and save taxes they would have to cough up in India.

“The constant flow of rich Indians moving to another country or taking up residency in another country can be a concern for India as it plans to reach the $5 trillion economy,” said Sudhir Kapadia, national leader-tax at EY India. “One of the ways we attract more HNIs to continue with Indian citizenship is to increase the number of days from 120 to 180 to be an Indian citizen.”

In 2019, India was second only to China when it came to high net worth individuals (HNIs) leaving the country, according to a Global Wealth Migration Review report.

As many as 7,000 HNIs left India in 2019.

In all, about 30,000 to 35,000 rich Indians would have left the country in the past five years or so, as per industry estimates.

“Reducing the number of days was aimed at increasing income tax collections but that seems to be counterproductive as many Indians have rushed to take citizenship elsewhere,” said Kapadia.

Tax experts have suggested that increasing the number of days would at least mean that these rich Indians would stay in India or spend longer time in the country.

This would also result in more GST collections and other incremental revenues on their spending in India.

The government in 2020 changed the regulations for Indian citizens and persons of Indian origin visiting the country.

The government said that for tax purposes, an individual will be treated as an Indian citizen if the stay in India is more than 120 days during a year.

This is targeted at rich Indians, as this is applicable to those earning more than Rs 15 lakh per annum, the government clarified.

Tax experts said that in many cases, the stay in India was part of tax planning.

“The main issue why many Indians are taking up residency in countries such as the UAE and Singapore is the high individual tax rates in India,” said Saraswathi Kasturirangan, partner at Deloitte India. “With a 37% surcharge over a 30% tax rate in India, the maximum marginal rate is as high as 42.74%. While reducing tax rates for individuals should be a priority, the number of days’ stay in the country for taxing global income in India is also crucial.”

For some of the businessmen—mainly who handle investment companies or are into international trade—not staying in India is part of their tax planning. They avoid staying in India merely to avoid coming under the tax net.

From the point of personal income tax, an individual staying in India for more than the stipulated period changes the fact pattern of which country has the first right to tax the individual.

In many cases, these NRIs used to stay in Dubai, Luxemburg, Hong Kong and Singapore to reduce their stay in India. High net worth individuals often planned their stay in a way that they spent a substantial part of the year flitting between tax havens.

In many cases, say experts, even Covid has created complications for many executives. Several executives who have a job in another country but were stuck in India along with several Indians, who stay in other countries to avoid triggering residency status in India, are set to face tax and other regulatory problems this year.

“This is more so where we see employees stranded in India due to Covid-related challenges or have decided to stay with their family in India during difficult times,” said Kasturirangan.

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