A new provision introduced in India’s 2021 budget is likely to hit companies which have NRI-owned group entities in countries like the UAE.
The UAE and some other countries, which do not levy income tax on individuals, are used by several Indian businessmen to avoid paying taxes in India, claiming they are eligible for exemptions under bilateral avoidance of double taxation treaties under non-resident Indian (NRI) status.
The UAE and India have a double taxation avoidance agreement (DTAA) in existence since 1992.
A new amendment introduced in the Indian tax laws has redefined the term ‘liable to tax’, which will effectively end this practice, a tax expert told Arabian Business.
They said the move will impact Indian companies that have NRI-owned group entities in countries like the UAE, which are actually run from India.
However, NRI businessmen who actually reside in the UAE or other such countries will not be impacted.
“Presently, the law does not define the term ‘liable to tax’ under section 6 relating to residency rule of the IT Act. Now, it is proposed that the term ‘person liable to tax’… is defined as a person having a liability of tax under the law of any country and includes a case where subsequent to the imposition of such tax liability, an exemption has been provided,” Rahul Garg, a tax expert and partner with PwC India, told Arabian Business.
“This would impact taxation of individuals who have been taking shelter of double tax avoidance agreements with countries like the UAE,” Garg said.
Rahul Garg, tax expert and partner with PwC India
The amendment will be effective from the current fiscal year which runs until the end of March and will be applicable in subsequent years.
Garg said although the amended tax law provides for such businessmen to claim exemptions after paying the taxes, since there is no personal income tax in countries such as the UAE, no such exemptions can be claimed under DTAA.
“Effectively, the new amendment could bring the curtain down on this practice,” Garg said.
Officials at trade bodies said they expect some NRI associations to make representations to the Indian finance ministry against this move.
Experts said some businessmen, who reside in India for more than the stipulated period of 180 days under the NRI definition, claim NRI status as their families reside in those countries and hence used to claim tax exemptions under DTAA under certain court rulings in India in the past.
“The current amendment, however, will enable taxmen in India to tighten the loophole on this,” Garg said.
Until now, the term ‘liable to tax’ had not been clearly defined. As a result, the taxman used a host of other mechanisms to deal with such cases. Some of these were exclusively related to Indian citizens living in the UAE, according to tax experts.
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