Changes to expatriate tax policies in India’s Budget elicit mixed reactions from Indian Americans

Union Finance Minister Nirmala Sitharaman, holding a folder containing the Union Budget documents, poses for photographers along with MoS for Finance Anurag Thakur and a team of officials, outside the Ministry of Finance, North Block, on February 1, 2020 in New Delhi. (Getty Images)

The Indian government’s reported proposal in the Union Budget last week seeking to bring NRIs living in tax-free countries under tax net in India was seen by some Indians Americans as “counterproductive” for foreign investors while others welcomed the measure.

The Finance Bill, 2020 proposed that an Indian citizen shall be deemed to be resident in India, if he or she is not liable to be taxed in any other country or jurisdiction. Officials said in post-budget briefing that Indians who are not tax residents in India but at the same time are neither tax residents in any other country will henceforth be taxed in India.

The Union Budget also changed the definition of a non-resident Indian, with a new stipulation that if an Indian national wants to claim the NRI status s/he now has to stay abroad for 240 days, as against 182 previously.

Noting that some people are “residents of no country” and may be staying in different countries for certain number of days a year, officials in New Delhi said if any such Indian citizen is not a resident of any country in the world, he'll be deemed to be a resident of India and his worldwide income will be taxed.

“It is unfortunate that the government is going after NRIs who have been contributing to the economic well-being of their Motherland. It will seriously affect NRIs and PIOs going to India to do business and investment in India,” Thomas Abraham, Chairman, GOPIO International, told India Abroad.

“The government must make conducive atmosphere and policies to attract more investments in India rather than passing laws which will curtail the NRI investment in India. The laws, if passed, will have adverse effect on NRIs’ participation in India’s development,” Abraham said.

Others like Rajiv Khanna, president of New York-based India-America Chamber of Commerce, expressed similar sentiments.

Khanna said that while it is in the interest of India to close tax loopholes, he was not sure the measure will be in India’s long-term interest in terms of attracting investment and spur growth.

“While I appreciate the government’s efforts to close perceived tax loopholes, the ultimate yardstick by which every measure has to be judged is whether it will increase investment and employment in India and its growth. Unfortunately, when judged by that yardstick, I fear this measure maybe counterproductive,” Khanna told India Abroad. He wondered if the proposed measure would cause India’s entrepreneurship drain or not.

Tax professionals in India have said the proposal will help because it was entirely possible for high-networth individuals to arrange his business affairs in such a fashion in India that he would not be liable to be taxed in any other country and also not in India because he is not a resident of India but also not a resident of any other tax-free countries like the UAE, Saudi Arabia, or other Middle-East countries.

Alok Aggarwal, founder of San Jose-based Scry Analytics, a machine learning and natural language processing products and services company, said although he does not support many of Modi government’s policies and acts like the CAA, he believes there was little reason for so much noise and concern over the new taxation proposal.

“I know people are upset with the Modi government, especially on the citizenship issue, which is justified as this is a very bad law, and also it’s a fact that India’s economy is not doing well, but the proposal of taxation for NRIs should be welcomed because it stands to reason that people who have income in India, whether by way of rent from property or any other source and live in the country, even if for a short period, pay taxes there,” Aggarwal said.

“They are simply asking for taxes for income in India and every country in the world, including U.S., Canada. U.K. and others, do it that way. “For example, if a U.S. citizen lives for some time in India, the U.S. government will first figure out how much taxes s/he will pay there and then will charge him taxes here in the U.S., accordingly, subtracting whatever he is paying in India. It is as simple as that,” Agarwal said.

On the other hand, he said, he feels the government should have made no such limit on the number of days a person has to live abroad in order to qualify for an NRI status.

“The issue is simple: if one has income in India one should pay taxes. It is a different thing that I was expecting the Finance Minister to give more benefits and incentives for people because the country is not doing well economically but she decided to be conservative. But as far as the NRI taxation is concerned, I think it is a non-issue,” Aggarwal said.

Aggarwal, however, said he does not subscribe to the view that the measure will discourage investments in India. “This is because most of this investments in startups in India is coming from private equities and venture capitalists who are not of Indian origin, anyway,” Aggarwal said.

Others like Silicon Valley-based venture capitalist Vish Mishra, venture director at Clearstone Venture Partners and a former President, TiE Silicon Valley, described the proposal a “definitely a positive source” of capital in India.

“With the proposed change in residency requirement of 240 days, India will get additional tax income for Indian citizens living abroad who are doing business in India,” Mishra said.

“However, this may result is some people opting to surrender their citizenship and opt to become permanent residents in other countries, but I doubt many will move in that direction. After the dust settles, they will show their love of their country and pay their Indian taxes as they have been remitting money to India,” Mishra told India Abroad.

Media reports in India said alarmed by the possible implications of the new provisions, Kerala Chief Minister Pinarayi Vijayan wrote to Prime Minister Narendra Modi, conveying the State’s strong disagreement over the Budget provision as it will hurt Indians working in the Middle East “who toil and bring foreign exchange to the country’ through remittances," the government came out with a clarification. 

In the wake of hue and cry in India over the proposal, the Indian government sought to clarify a day after the budget proposals were unveiled that there is no intention on the part of the government to tax global income of NRIs and that only income generated in India will be taxed.

In a statement the Finance Ministry said this is an anti-abuse provision, since it has been brought to notice that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India.

“The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media, the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries, will be taxed in India on the income that they have earned there. This interpretation is not correct," the statement said.

“In order to avoid any misinterpretation, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession,” it added.

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