The government on Sunday clarified that the proposed tax on NRIs will not apply on bonafide Indians working in tax-free foreign countries and is intended on only those seeking to escape tax by exploiting their non-resident status.

Finance minister Nirmala Sitharaman in her budget for 2020-21 had proposed to tax non-resident Indians (NRIs) who do not pay taxes in any foreign country. This provision raised anxiety in the minds of those working in the Gulf region where countries don't tax income earned by individuals.

First Sitharaman clarified that only Indian income of NRIs is proposed to be taxed under the new provision, and later the finance ministry issued a statement to say that “the new provision is not intended to include in the tax net those Indian citizens who are bonafide workers in other countries”.

The statement added that “in order to avoid any misinterpretation, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Necessary clarification, if required, shall be incorporated in the relevant provision of the law”.

The budget has tightened the screws on those seeking to escape tax by exploiting their non-resident status.

While earlier it was possible to be classified as a non-resident by staying out of the country for 183 days or about six months in a year, this has now been, in effect, enhanced to 245 days.

Bid to check evasion

Revenue secretary Ajay Bhushan Pandey said the new rule was “an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas”.

Indians working in West Asia, as well as those in Merchant Navy, will not be taxed using the new provision.

“What we are doing now is that the income of an NRI generated in India will be taxed here. If he’s earning something in a jurisdiction where there is no tax, why will I include that into mine that has been generated there,” Sitharaman told reporters here on Sunday.