K. Srinivasan

K. Srinivasan on tax problems posed and faced by non-residents and assessees not ordinarily resident

EFFECT has already been given to some of the recommendations of the working group on non-resident taxation through the Finance Act, 2003. Several substantive amendments have been made to Sections 9, 10, and so on, and a new Section 44DA has been inserted.

There are several others that are yet to be implemented/considered. Some of the pending suggestions on which the Government's reactions are not known are gone into below.

Status of not ordinarily resident

In almost all countries, the base for direct taxes depends on the residential status of the taxpayer. Only two classes of taxpayers — residents and non-residents — are recognised all over the world. India though is an exception where a third category has been spawned — resident but not ordinarily resident (RNOR).

This is a curious legacy of British rule. In order to lighten the tax burden on residents of Britain who sought their fortunes in India, the special status was devised. This is how sub-clause (6) of clause (1) of Section 6 of the Income-Tax Act, 1961, which carves it out, reads till April 1, 2004:

"A person is said to be "not ordinarily resident" in India in any previous year if such person is an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of or periods amounting in all to seven hundred and thirty days or more."

The provision was not omitted from the Indian Income-Tax Act, 1922 after the country attained Independence only because it turned out to be attractive and fruitful for Indian nationals, too, thereafter. Residents in India who went abroad qualified for the tax benefit easily; and Indians who returned to India after a stint for a few years outside, could enjoy immunity to tax on their foreign income for a long time after their homecoming.

No statistical information about the loss of revenue on this account appears to have been published by the Government, that is, how many assessees had been treated as RNOR each year, how much aggregate tax exclusion had been enjoyed by them each year, and so on.

The tax benefit could not be taken to be a tax incentive because the assessee concerned had suffered no hardship, and no benefit to India could possibly result from the RNOR reaping an unmerited, gratuitous tax advantage. The working group has recommended the scrapping of this historical freak relic; and there cannot be two views, from the purely economic or equity point of view about the desirability of doing so.

The Finance Act, 2003 merely substituted a new clause for the existing one in the last line of the definition of an RNOR in para 1 above.

For reasons which are not evident it contented itself with amending the words "seven hundred and thirty days or more" to "seven hundred and twenty nine days or less" in the existing provision. The amendment did eliminate the uncertainty that plagued the provision to some extent.

The beneficiaries of the provision and the quantum of the benefit are, however, unaltered for all practical purposes. What the country has gained from it or is likely to gain in the future is unclear.

The provision has been a stale joke among the taxpayers that does not deserve preservation any further like a national heritage.

Chapters XIIA, XII

It has been rightly pointed out that tax should be neutral to the residential status of a person. Gross income from long-term capital gains and income from investment in specified assets in India are charged to tax at 10 per cent and 20 per cent respectively.

This concession does not help the non-resident Indian (NRI) because he is liable to tax on the income in question in the country of his residence, getting credit for the tax paid in India against the tax charged on that income in the country of his residence.

As usual, the exchequer of that country will gain to the extent of the tax that is saved by the assessee in India since he will have to cough it up there on his assessment to tax on his global income.

The discrimination made in India to the prejudice of NRs who are not of Indian origin serves no purpose apart from betraying a bias in favour of NRIs in this country.

Chapter XIIA is, therefore, an exercise in futility and no one will miss it if it is omitted from the Act, as suggested by the working group.

The same grounds as those set out above in regard to the provisions in Chapter XIIA call for the omission of Sections 115AB (tax on income from units purchased in foreign currency or capital gains arising from their transfer), 115AC (tax on income from bonds or global depository receipts purchased in foreign currency or capital gains arising from their transfer), and 115AD (tax on income of foreign institutional investors from securities or capital gains arising from their transfer).

As advised by the working group, these sections may be omitted; as also Sections 196B and 196C relating to tax deductible at source from them.