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3 DTC provisions that make NRIs wary
February, 28th 2012

The Direct Tax Code (DTC) is expected to become effective, at least partly, from the 1st of April 2012. A few provisions of the DTC are a little harsh for Non Resident Indians.

Change in definition of NRI

Right now, a person is considered a Resident Indian if he fulfills either of these two conditions:

1.he was in India in that year for period amounting in all to 182 days or more, or

2.has within the four years preceding that year been in India for a period amounting in all to 365 days or more, and has been in India for 60 days or more in that year.

If he fails to fulfill either of these two conditions, but fulfills both the following conditions, he gets an intermediate status of Resident, Not Ordinarily Resident.

1.He has been resident in India in at least 2 out of 10 years (according to the basic conditions noted above) preceding the relevant tax year; and

2. He has been in India for a period of 730 days or more during 7 years preceding the relevant tax year.

If he fails to fulfill all above conditions, he is a Non Resident Indian.

Under the proposed DTC, any individual (including NRIs/PIO) will become resident, if they are present in India for 60 days or more in the financial year and 365 days or more over a period of four years prior to the financial year and would be liable to pay taxes on their Global Income.

According to Rohit Batra of E&Y, this change would have an adverse impact on the NRIs frequently visiting India either for personal or business visits, since, they now need to plan and check the duration of each of their visits in any year to avoid becoming resident.

However, a resident would be eligible to claim exemption of income accruing to him/her outside India, from a source other than a business controlled in or a profession set up in India, if the resident: i. has been a non-resident in India in nine out of ten preceding financial years; or ii. has been in India for less than 730 days, during the seven preceding financial years

Thus, NRIs who become resident of India may not be required to pay tax on their global income, if they satisfy any of the above mentioned conditions.

Wealth tax As we have seen in the first point, under the DTC, returning Indians (including foreign citizens) can become Residents in India in the first year of their arrival into India. They may thus become liable to pay wealth tax on their global assets. The WT Act also has a specific relief in respect of wealth (including assets purchased by utilizing the funds brought from abroad) brought back into India by returning Indians. This exemption from wealth tax applies for seven successive assessment years commencing with the 'assessment year' (April 1 to March 31) following the date on which the individual returned to India.

Sourabh Goradia of E&Y says that there is no such beneficial provision under the DTC.

Compulsory tax residence certificate

Another point that Batra highlights is that the proposed DTC specifically provides that a non-resident shall not be entitled to claim relief under the provisions of the relevant tax treaty, unless, a certificate of tax residence is obtained by him from the tax authority of the overseas country in a prescribed form.

While this certificate is practically required under the current provisions also (if the case was picked up for assessments); in the proposed DTC the same will become a mandatory requirement.

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