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Are bona fide Indian residents in the Gulf covered by tax?

Q: I read in the Press that the Indian government has clarified that bona fide residents in the Gulf would not be impacted by the new provision to tax their income in India. What is the implication of this clarification and how would it be decided as to who is a bona fide resident?
A: This clarification was issued in the context of the provision introduced in the budget last month, which treats an Indian citizen to be a resident of India for tax purposes if he is not a resident of any other country. This is meant to cover persons who stay for short durations of three to four months every year in multiple countries and are, therefore, not considered as resident of any of those countries. Persons employed in the Gulf on an employment visa would not be covered by this new provision despite the fact that no tax is levied under the local laws on the income earned. However, doubts have been expressed that where income which is purported to be earned in the Gulf from an employment is far in excess of the services rendered, such 'bloated income' may be taxed in India. This would be done in the case of such persons where the investigating authorities have some material to show that the money is being laundered out of funds which were earlier illegally remitted from India.
The Directorate of Investigation has also found cases where companies are incorporated in the Gulf and high fees and salaries are paid, which are not commensurate with the services rendered. Past assessments have also been reopened in India in such cases to bring to tax such bloated income which could be attributed to money laundering. In such cases, the tax authorities go beyond the tax residency certificate and find out how many days a person has actually spent in the country of which he claims to be a resident. In short, genuine employees who are actually working in the Gulf and are paid a market driven salary based on their experience and qualifications would not be covered by the new rule and would continue to be exempt from tax in India on their overseas income.
Q: There are some investment advisers who promise guaranteed income and recommend high-risk products to clients. Is any action being taken to curb such practices?
A: Corporate advisers and individuals carrying on business through limited liability partnership firms have been rendering advisory services and also distributing and selling products to the same client. Complaints have been received by the Securities and Exchange Board of India (Sebi) from clients of such entities who have suffered losses. The market regulator has, therefore, come up with new rules to debar investment advisers from selling financial products to the same client to whom they provide advisory services. This is done to curb mis-selling and to protect investors.
Therefore, an entity can now provide either advisory services or distribute financial products to a client, but not do both. A client is defined to include spouse, children and parents. However, a parent company is permitted to have two corporate entities, whereby one subsidiary will provide advisory services and another subsidiary can do the business of distribution and selling of financial products. The Sebi has also imposed limits on the fees that can be charged for different services rendered to clients.
Q: I am a member of a Rotary Club in Mumbai, though I have been an NRI for the past several years. All the members contribute every year by way of membership fees to cover administrative costs and expenses for holding regular meetings. As I am on the finance committee, I am grappling with issues of taxation and Goods & Services Tax because attempts are made by these departments to levy tax on the membership fees earned. I seek your valuable guidance in this regard.
A: As far as the provisions of the income-tax law are concerned, an organisation that collects funds by way of membership fees or otherwise and spends such amount on its own activities, would not be liable to tax. This is in view of the fact that such organisation is governed by the principle of mutuality as the contributors of income and the participators are the same group of people. In short, the funds are collected from the members of the organisation for spending the same for the benefit of those members. Such income cannot be treated as taxable as held by the Supreme Court of India in several cases. If any fee or income is earned by rendering any service to non-members, only such income would be liable to tax.
As far as the Goods & Services Tax is concerned, some organisations including Rotary Clubs have been held by subordinate authorities to be liable to pay GST on membership fees or service charges. However, recently the Maharashtra Appellate Authority for Advance Rulings has held that where an organisation like a Rotary Club does not earn any income by offering any facilities or services, GST will not be applicable. The GST law defines business to include facilities or benefits provided by a club to its members against fees which are charged. Therefore, collecting membership subscription, which is utilised for administrative expenses and holding regular meetings of the club cannot be treated as income arising from any business activity. In such cases, there would not be supply of any services to the members. Hence, GST cannot be levied.
H.P. Ranina is a practicing lawyer, specialising in tax and exchange management laws of India.

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