Budget benefits NRIs and quashes tax fears (Comment)

When a non-resident Indian (NRI) lands in India now, he or she can zoom through customs with duty-free goods worth Rs.35,000 ($685). That's a small increase from the earlier duty-free allowance of Rs.25,000.

As millions of Indians travel abroad every year and have become big spenders, they have been clamouring for a duty-free allowance of at least Rs.50,000 ($1,000). They argue that considering the prices of designer goods which the middle and upper income Indians and NRIs aspire for, even this amount is not enough. So we just thank the government for small mercies as we walk the green channel with goods worth Rs.35,000 plus a laptop, a mobile and a camera, among other small items.

The budget has quashed a major fear of NRIs to pay income tax on their global income if they stay in India for more than 60 days a year. Frantic e-mails on this topic were whizzing around for weeks before the budget. It was feared that if an NRI goes to India on different trips and stays for a total of 60 days in the year, he will be considered as a resident and will have to declare his foreign income and pay tax on it. It does not matter if the person has lived outside India for decades.

This change in tax residency is deferred for now (but not dropped). Phew! It's a great relief! The change in tax residency is part of the Direct Tax Code (DTC). Hence, an NRI will be considered as tax resident in India in a financial year only if he stays in India for more than 180 days in that financial year.

The big news in this budget is retrospective legislation for income tax liability in the famous Vodafone case. The Indian government lost $2 billion in tax after Vodafone bought Hutchison's stake in Hutch Essar for $12 billion. In a court case, the tax department argued the tax is payable in India as the assets involved are located in India. Vodafone and Hutchison argued that the sale took place outside India. Vodafone won the case in January this year. The tax department has moved to the Supreme Court. The budget announced that the government can tax merger and acquisition (M&A) deals overseas for Indian assets with effect from April 1962.

This announcement sent ripples abroad and many NRIs became worried about their deals going back 50 years. How will NRI directors of a foreign company taking part in a foreign exchange transaction of assets located in India be affected even when the transaction is done outside India?

A leading lawyer and a qualified accountant, Rajan D. Gupta of SRGR Law Offices, clarified, 'The proposal for retrospective amendment to undo the effects of the Vodafone judgment of the Supreme Court is intended to cover only those situations where the businessmen invested into Indian companies holding substantial business assets through shell companies/investment vehicles setup in tax heavens.

Therefore, such provisions would not apply to NRIs directly holding assets in India, whether in the nature of shares in Indian companies or immovable properties in India. Only those NRI directors of foreign companies who hold Indian assets through investment vehicles set up in offshore tax havens would need to take into account such provisions. Indeed, it is important to understand that transfer of assets, which are directly held by NRIs, would always be subjected to taxation in India and the benefits under applicable double taxation treaty, if any, would apply.'

NRIs are entitled to claim relief in India only based on Tax Residence Certificate (TRC) from the government of the resident country. Even though no difference between individuals and companies has been given, a TRC appears to be more relevant for an offshore company because it will be important to determine if such a company is a mere shell entity or is a real company having substantial presence in that country. In the case of an individual, the tax residence cannot be easily determined/established by way of entry stamps of countries visited/stayed in his/her passport, said Gupta.

Payments by some Indians to NRIs will be examined by the tax officer for determining taxable income. If such remittances from Indians are intended to be free of withholding tax (TDS), a No Objection Certificate (NOC) from tax officer will be required.

Basically, the budget has encouraged NRI investors.

(07.04.2012 - Kul Bhushan worked abroad as a Business Editor and later a media consultant to a UN agency. He lives in New Delhi and can be contacted at: kb@kulbhushan.net).