Since a decade, particularly, after the passage of the Black Money Act in 2015, several Indians became NRI to generate fake overseas income such as trading profits, consultancy fee, and fat salaries to legitimise undisclosed funds stashed abroad. Such people will be in a spot as they may have to justify their income.
“The burden has now shifted to assessees to prove that they earned abroad as ‘bona fide workers’. This is in line with the government’s press release, though no such term exists in the law,” said senior chartered accountant Dilip Lakhani.
The government’s press release issued a day after the Budget, assuring that “bona fide workers” will not be taxed on what they earn abroad is a veiled hint to other NRIs that have to justify their bloated overseas income. Till now the tax office has not taken such a stand. According to the Finance Bill 2020, any Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India. Such residents will have to pay tax on overseas income and disclose foreign assets.
Retrospective Implementation
“But, all NRIs are not bona fide workers. They earn income from business, executive positions or as promoter of foreign JVs. The word ‘bona fide’ without objective test will create difficulties. This could trigger multiple litigations,” said Lakhani.
People who became NRIs to whitewash unaccounted wealth structured their transactions to lend an air of legitimacy.
For instance, against bogus invoices they generated fake trading income, and often layered the transactions through multiple companies to make the amount profit generated at each level believable.
Some used their Indian business entities to make overseas direct investments (ODI) — allowed up to four times the new worth with the total amount split into a small equity and large loan — and brought back undisclosed overseas funds as capital gains and interest on loans. Others joined as senior executives or directors earning absurd fees and salaries. Questioning these earnings would mean going beyond salary certificates or tax residency certificates obtained from abroad.
“However, verification of income of NRIs for preceding years would amount to investigation being done from a retroactive perspective. To avoid litigation it is advisable to define what is ‘bona fide’,” said Mitil Chokshi, partner at Chokshi & Chokshi LLP, a tax consultancy and forensic firm. Though tax officials cannot give a restrospective effect to the law for period prior to FY 20-21, there is nothing that stops them from referring such cases to the agencies which probe money laundering activities.
The proposed law on stateless persons and the new residency rule could however pose hurdles for many genuine businessmen. Ambiguity on who are ‘genuine workers’ would be an issue for many in the gems and jewellery business where family members serve as directors in their own companies in Dubai, Hong Kong and Belgium, said Nirav Jogani, Partner at RSM Astute Consultech.
“In most cases one brother would have a company in India and another brother might have a company in Dubai or HK or Antwerp. These NRI businessmen keep on traveling to different countries for procuring rough diamonds and may not fulfil the condition of residency in a particular country. He may have economic interests in different countries and family members in different countries. All these situations would lead to complexities and disputes,” said Jogani.
An NRI establishing her fiscal domicile status in another country, would be required to stay in that country — which could be UAE or Singapore or HK — for a minimum number of days. “If tax assessing officers go beyond tax residency certificate issued by another country and checks the number of days spent there, in some cases it may be difficult to prove as passports are not stamped for e-visas. Also, financial year for most countries is January to December. So a person who spends the first three months (January to March), and the last three months (October to December) in Singapore will be considered a resident by Singapore authorities. But will Indian rules require him to spend 182 days in Singapore between April and March for establishing Singapore as his fiscal domicile?” said a senior lawyer.
Under the proposed residency rules, any citizen of India or persons of Indian origin overstaying for 120 or more days on visit to India will be considered as resident whose global income would be taxed by Indian authorities.
However, the I-T office may simultaneously insist that an NRI spends a minimum number of days in another country to avoid being labeled as “stateless”.
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