Financial year 2020-21 started under the cloud of the coronavirus lockdown and almost every sector of the economy has borne the brunt of the pandemic over the last nine months. The Indian government introduced many schemes during this time to help the industry and individuals tide over the slump and provide an impetus to the economy. This included economic packages for various sectors, easing of regulatory compliances and healthcare and social security benefits to economically weaker sections.
Human spirit being inherently resilient, we now see signs of economic recovery with most sectors bouncing back. Against this backdrop, taxpayers and the public at large are now waiting for the Union budget on 1 February 2021 to lay out the roadmap for an economic revival.
Individual taxpayers play an important role in nation-building. As per tax department’s data, over 90% of the tax returns are filed by individual taxpayers, contributing about 40% of the total direct tax revenue. Among individual taxpayers, it is not only the Indian residents, but the non-resident Indians (NRIs) too who play a significant role in terms of foreign remittances, participation in the economic activities and payment of taxes.
Although measures introduced in previous budgets in terms of optional tax regime, exemption from filing tax returns in certain cases etc. found favour with the NRIs as well, further steps to ease compliance burden and provide parity with resident taxpayers in certain areas would benefit NRIs.
Review of residency conditions
Many NRIs employed with companies outside India were stuck in India due to the lockdown and were able to travel back to their host countries only when international travel restrictions were lifted. The government in March 2020 issued relaxations for excluding certain India stay days to determine tax residential status for 2019-20.
The finance ministry had stated that a similar relaxation would be announced for 2020-21 as well, so that individuals are not adversely impacted due to unavoidable circumstances for extended period of stay in India. The government should announce the relief measures soon to provide clarity to a large number of globally mobile NRIs vis-à-vis the determination of their residential status and taxability.
Extend benefit of presumptive taxation
NRIs who have income from specified professions are not eligible for benefit of presumptive taxation on income earned up to `5 million which is applicable only to resident taxpayers. Therefore, a non-resident taxpayer is required to maintain detailed books of accounts to claim deduction for any profession related expenses. In an increasingly e-connected world, there is a lot scope for highly qualified NRIs to provide professional services to businesses in India. Extending the scope of existing presumptive tax schemes to include eligible non-residents as well under its ambit would facilitate ease of doing business in India by way of reduced compliance burden.
Tax withholding on rental payment
As per current tax laws, the rate of tax withholding applicable for payment of rent to resident taxpayers above specified threshold is 5% or 10% based on category of payer making the payment. However, in case of payment of rent to a non-resident individual taxpayer, the same is subject to tax withholding at the applicable slab rate. In the absence of the NR taxpayer’s income details, such rental payments are often subject to tax withholding at the maximum rate of 30%.
Also, this casts an obligation on the payer to determine the residential status of the recipient, whereas the payer may not be equipped to do so. As a fallout, withholding taxes at an incorrect rate may also lead to non-compliance by the payer and unnecessary dispute and litigation.
Over the years, NRIs have made significant investments in real estate in India and continue to do so. The higher taxes withheld on rental payments leads to cash blockage till processing of their tax returns. Tax withholding provisions serve the dual purpose of bringing the recipient within the tax net and ensuring collection of taxes at a regular frequency during the financial year. Extending the provisions for tax withholding at 5% or 10% of the rental payments to NRI taxpayers would provide a significant relief while at the same time does not impact the overall tax revenue for the government for a particular financial year. This would also eliminate the risk of non-compliance in applying the rate of withholding tax by the payer.
Tax withholding on purchase of immovable property from NRIs
Finance Act 2013 had introduced a provision wherein any person purchasing immovable property valued at `50 lakh or higher is required to deduct tax at the rate of 1% from the payment being made to the seller. However, this provision was restricted to payments made to a seller who is a tax-resident in India and where the owner of property, i.e. the seller is a non-resident, taxes are required to be deducted at the applicable slab rates.
Accordingly, the taxes are typically withheld at 30% in such cases. It is important to note that income from sale of immoveable property is taxable as capital gains, wherein the capital gain is calculated as the difference between the sale consideration and the cost of acquisition. In case of immoveable property held for more than 24 months, an indexed cost of acquisition can be considered to account for inflation. Further, long-term capital gains are taxable at the rate of 20%.
Therefore, where taxes are withheld by a buyer at 30% of the sale value, the same results in significant cash blockage and subsequent issue of refund. The government may therefore consider extending the benefit of 1% tax withholding on purchase of immovable property from an NRI seller. As in case of payment of rent, this would also eliminate the risk on non-compliance in applying the rate of withholding tax by the payer.
Requirement to obtain tax residency certificate for claiming tax treaty relief
For a non-resident deriving income from sources in India, provisions of the relevant tax treaty between India and home country would apply to the extent the provisions under the tax treaty are more beneficial vis-à-vis provisions under domestic tax laws. The Finance Act, 2012 had introduced a mandatory requirement for non-residents to furnish tax residency certificate (TRC) for claiming any benefit under the tax treaty. The purpose of introducing this requirement was to ensure that treaty benefit is availed by only taxpayers who are tax residents of a particular country with which India has a tax treaty.
However, this requirement has led to hardship for many non-residents and the resident payers as well, as the non-resident is compelled to obtain a TRC even where the income and tax amount involved is not significant. There is also the cost of obtaining the TRC. It is important to note that the tax treaties do not have any provision tying the benefit under the treaty to submission of TRC. This has also even been a subject matter of dispute at various appellate levels and divergent views of courts exist on this matter.
Against this backdrop, the government may consider specifying a minimum income threshold for applicability of this provision relating to obtaining a Tax Residency Certificate by Non-resident, to provide relief to small transactions.
Other areas for administrative ease
Apart from the above, there are other areas where compliances can be eased for NRI taxpayers. For example, with effect from 2017-18, Non-resident individuals are required to file the lengthy Form ITR 2 or 3. To promote ease of tax compliances, the government may re-introduce simplified tax return forms for NRIs who have no capital gains or business/professional income in India or having income within specified thresholds. Presently, the simplified tax return forms i.e. ITR 1 Sahaj and ITR 4 (for presumptive tax in case of professional income) can be filed only by individuals who are resident in India.
The above proposed changes are simple steps that would bring cheer to NRIs and go a long way in easing compliances for the NRIs who have maintained social and economic ties with India and continue to contribute to the nation-building.
This article was originally published on Mint here.