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Taxation on Indian Citizen or Persons of Indian Origin – A Paradigm Shift (Post Union Budget-2020)

A: Introduction

In this blog, we shall have a detailed analysis of Budget-2020 proposal on residency provision under section-6 of the Income Tax Act, 1961 and its impact on Indian Citizen or persons of Indian origin who are non-residents. They may be asked to give source of their foreign source income or ‘bloated income’.

Taxation may base on 4 principles worldwide: i) Citizenship based system like USA; ii) Resident based system like India; iii) Source based system like Hong Kong and iv) No tax on any Income or some income either Country/outside country source Income like Gulf Countries, Singapore (no capital gain tax) etc; meaning thereby taxing their citizen/residents on their worldwide Income and give relief on their source income from outside Country and only taxing their citizen/residents on their source Income in the Country of citizenship/resident not to tax their foreign source Income.

B: Comparative Study Pre-Budget vs Post-Budget

Pre-Budget

  1. No Deeming provision of residency for Indian Citizen or persons of Indian origin who are non-residents as per provision of Section-6 of Income Tax Act.
  2. Indian Citizen or persons of Indian origin who are non-residents can maintain their status still staying in India for 181 day in the previous year and enjoying doing business in India & outside India from India.
  3. Indian Citizen or persons of Indian origin who are non-residents can maintain the non- taxability of their foreign source Income up to 2 years from becoming resident in India.

Post-Budget

  1. Deemed tax residency for Indian Citizen or persons of Indian origin who are non-residents as per provision of Section-6 of Income Tax Act if they are not liable to tax in any other country or territory by the reason of his domicile or residency or any other criteria of similar nature.
  2. Indian Citizen or persons of Indian origin who are non-residents can maintain their status still staying in India up to 119 day (form 181 day) in the previous year and enjoying doing business in India & outside India from India.
  3. Indian Citizen or persons of Indian origin who are non-residents can maintain the non- taxability of their foreign source Income up to 4 years from becoming resident in India.

(These amendments will come into force from AY 2021-22.)

C: Impact

  1. India would like to collect more tax from its Citizen or person of its origin or we can say moving towards citizenship based taxation to residency based taxation.
  2. Indian working in those country who does not either tax on any Income or all income would impacted most.
  3. It becomes a bit difficult for all those Indian Citizen or persons of Indian origin who are non-residents to enjoy staying in India without getting tax their Income source outside India.
  4. Most importantly, Indian Citizen or persons of Indian origin who are non-residents becoming resident by the virtue to deeming provisions will have to comply like disclosing foreign assets in India and non-residents may be enquired about their foreign source income or ‘Bloated Income’.

D: Way Forward

  1. There are lot of concerns just after the budget day from Indian Citizen or persons of Indian origin who are non-residents as per provision of Section-6 of Income Tax Act who are working in territories who do not have tax on any income or exempt most of the income source from that territory.
  2. The same very day, in spite of being Sunday 2nd, 2020, the Indian Government issued a Press Release and assured all those concerned not to worry.

Though this proposal being made with good intentions of the Government; it is still to see how the government will ensure that the bonafide tax payers will be fully protected.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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