THE GIST of Editorial for UPSC Exams : 06 February 2020 (NRIs to Pay Tax (Mint))

NRIs to Pay Tax (Mint)

Mains Paper 3: Economy
Prelims level: Income Tax Act
Mains level: Proposed amendment in Income Tax Act

Context:

• An amendment is proposed to the Income Tax Act in the Finance Bill or the Union Budget 2020.
• It says that all Indians who are working abroad and not paying any income tax in those countries would be liable to pay tax in India.

What is the response?

• Kerala Chief Minister wrote to Prime Minister recording his government’s disagreement with the provision.
• He said that the proposal would hurt those who toil and bring foreign exchange to the country.

What is the existing law?

• Two parameters determine whether India levies income tax on an individual.
• Residential status: In India, residency requires a person to actually live in the country for a specified number of days in a year.
• The Source of the Income: It is the country where the income is being generated.
• For a resident Indian citizen, the income tax law applies to that person’s worldwide income and such a resident Indian is required to pay tax on all of it.
• But for a non-resident Indian, the income tax law applies only to the income earned from within India.
• This difference between residents being taxed on their global income and non-residents being charged only on their Indian income lies at the heart of the confusion.

What is the amendment proposed by the government?

• The proposed amendment to the IT Act has three parts.
• Number of Days: The number of days that an Indian citizen can stay in India without becoming a resident is cut from 182 to 120.
• The Memorandum to the Budget said this provision was being misused.
• NOR category: The Memorandum has carved out the “Not Ordinarily Resident (NOR)” category.
• This status ensures that an individual who isn’t ordinarily a resident isn’t taxed as a resident, just because he spends more than specified number of days in India during a particular year.
• The amendment states that an NOR would be someone who has not been a resident of India for seven of the past 10 years.
• Under the existing law, it is nine out of the past 10 years.
• The Confusion - This amendment said that an Indian citizen who isn’t liable to tax in any other country or territory shall be deemed to be resident in India.

Arising problem with this:

• The amendment tries to tax non-residents as residents.
• This led to panic because, in the absence of clarifications, all non-residents working in tax-free jurisdictions concluded that all their income in there will now attract the Indian income tax rate.
• Apart from the likely harassment, this undermined the whole point of people leaving their homes in India to work in tax-free jurisdictions.

Way ahead:

• The government has clarified that its intention isn’t to target bona fide workers.
• It says it wants to catch tax evaders who game the residency provisions to evade all taxes.
• It says that the tax laws should not encourage a situation where a person is not liable to tax in any country.

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Prelims Questions:

Q.1) With reference to the Quantum Technology, consider the following statements:
1. It is based on the principles of quantum theory, which explains the nature of energy and matter on the atomic and subatomic level.
2. The government has recently announced a National Mission on Quantum Technologies & Applications (NM-QTA) for a period of five years to be implemented by the Department of Space.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both
(d) None

Answer: A
Mains Questions:
Q.1) What is the amendment proposed by the government to the Income Tax Act for non-resident Indian?