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How India's new tax laws could affect NRI investors

Dubai - Entrepreneurs using tax havens to dodge taxation in hot waters

Entrepreneurs who use tax havens such as the UAE to dodge taxation in India are in hot waters. The reason – India’s tax laws now define the term 'liable to tax.'

Countries usually tax their citizens based on their domicile(s) or residential status. Many high-net-worth individuals (HNIs) have been planning their stay in countries in such a manner that they are not liable to tax in any country.

This amendment could affect Indian citizens living in countries where the taxation statute does not apply to individuals whose taxable income in India is above Rs1.5 million. Such citizens are regarded in India as 'Residents and Not Ordinary Residents'. These businessmen are now obliged to pay tax on India's overall income, as staying in India beyond the stipulated 120 days also means they control their enterprises in the UAE.

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. This would impact the taxation of individuals who have been taking shelter of double tax avoidance agreements with countries like the UAE.

The most common example will be Indian jewellery or diamond companies that have group enterprises in the UAE, by NRIs, but in fact, are owned and controlled from India. Income gained by NRIs in India, will now be taxed by these foreign firms.

A sigh of relief – for a salaried professional, this new tax change would make no difference. He/she does not have to pay tax in India on his overseas salary income. NRI businessmen who actually reside in the UAE or other countries, and conduct their business in those countries, will also not be impacted.

The new clause adopted in India's 2021 budget will likely affect companies that have group entities owned by NRIs in the UAE. UAE may no longer seem enticing as a tax haven for Indian entrepreneurs with the current tax laws in effect if the intention were to avoid tax liability in India. Therefore, a revision of the business model or operational processes would be crucial, making necessary reforms not to become too involved if there was no intention to avoid taxation in India by managing the residential status.

However, there is another side to these proposed tax changes. Most wealthy people in business would avail tax consultants or Chartered Accountants' services to find innovative ways to avoid these new tax rules. This can be done by routing the income generated from their business to other third-party accounts or classifying them as an alternative source of income.

Consulting fees, marketing expenses are some popular evasion methods. Well, wealthy people are wealthy for a reason and let us not underestimate them. Individuals who have taxable income in India, which is above Rs1.5 million, might suddenly "find ways" to reduce that income.