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Editorial: A Tie-Breaker Test

Port Wings, 12 Feb 2020:

The Finance Minister Nirmala Sitharaman’s clarification on taxing non-resident Indians (NRIs) in her Budget announcement doesn’t seem to have cleared all the doubts over the issue and may require the deployment of a rarely used avenue — the tie breaker — experts said.

This device is used to resolve any impasse between countries in deciding who has the first right to tax an individual. The February 1 budget had proposed that anyone not taxed in another country will be liable to pay income tax in India. That had panicked some NRIs who work in countries that don’t levy income tax, such as the United Arab Emirates.

The government then clarified that it doesn’t intend to tax income that bonafide workers earn overseas in order to allay such concerns.

This would be incorporated in the relevant provision of the law if required, the Central Board of Direct Taxes (CBDT) said. This will have to be done, experts said.

“A press release doesn’t have any sanctity in the law. Just look at the Mauritius tax treaty where several such press releases were issued and still there are several tax litigations around that,” said one of the experts.

A tie-breaker test is essentially a list of questions that the individuals concerned have to answer. They will be asked about the location of their homes and workplaces.

They will also be asked if they own any houses and where are these located, details about their economic and financial interests, where their families live, what properties they own in India and overseas.

“The present wording of the budget provisions suggests that Indian citizens would be charged to Indian tax if they are not liable to tax in any other country,” said an expert.

 “If such a person is also a resident of another country with which India has a tax treaty, as in the case of the UAE, the tie-breaker rule would come into play, which requires an examination of several factors, starting with that of a permanent home to determine where the individual would ultimately be taxed. The government has, however, clarified that it does not intend to tax genuine residents of other countries.”

The budget measure was meant as an anti-abuse provision since some Indian citizens are said to have moved to low or no-tax jurisdictions to avoid paying tax in India, the government said.

The tie-breaker may be invoked for Middle East NRIs in the form of self-assessment, which will require them to answer a set of questions. “Many NRIs may not be willing to give information about houses they own in India and outside the country or where all they have made investments,” said a tax expert.

The move may prompt some to change their citizenship, said experts. The clarification issued by CBDT adds more to confusion on the issues of Indian citizen being considered as deemed resident if they are stateless, i.e. not resident of any country.

This can have serious implications for all those Indian citizens who are not liable to pay tax in the country of their residence, and they may consider to even surrender Indian citizenship.

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