Budget 2021: Haven-seeking bizmen brought to earth

NEW DELHI: Businessmen, using tax havens like Dubai to avoid paying

taxes

in India, find themselves in hot water. The reason — India’s tax laws now define the term ‘

liable

to tax’.


The fallout? Nothing changes for a salaried worker, say, in UAE. He does not have to pay tax in India on his overseas salary income. But the provisions block the misuse of Dubai, and some other countries, for taxavoidance purpose (it could also hit genuine cases).

“This amendment could impact Indian citizens who reside in countries where there are no tax laws applicable to individuals, and whose

taxable income

in India exceeds Rs 15 lakh. Such people would be treated as ‘Resident and Not Ordinarily Resident’ in India,” says Gautam

Nayak

, tax partner, CNK Associates.

“Their income from foreign businesses controlled from India, or professions set up in India, would be liable to be taxed in India,” Nayak adds.

“While the direct Indian sourced incomes were already taxable in the hands of such individuals, they now have tax exposure to incomes earned by them outside India, but from businesses controlled or professions set up in India,” says Rashmin

Sanghvi

, a chartered accountant.

He illustrates: “The typical example would be Indian jewellery or diamond firms that have group companies in tax havens like UAE owned by NRIs, but are actually controlled from India. Incomes earned by the NRIs from such foreign companies can be taxable in India now.”

As the term ‘liable to tax’ was not defined, taxpayers used to rely on several decisions, including those given by the Authority for Advance Rulings – several of which related to UAE residents. “Certain rulings held that even ‘potential’ future liability to tax was enough to cover persons under the clause ‘liable to tax’. This has been negated by putting a precise definition under the Act,” adds Sanghvi.

The India-UAE tax treaty is worded differently and does not contain the term ‘liable to tax’. However, Sanghvi points out that some of those who seek to use Dubai as a jurisdiction to avoid taxes, may not be able to get a tax residency certificate. They do not reside in that country for 183 days or more to qualify for a tax residency.

He adds, “And even if they do, they would typically not be able to pass the tie-breaker test in favour of UAE. In such cases, the definition proposed to be provided in India’s tax laws, will be the stumbling block in aggressive tax planning tactics. In other words, such persons who cannot access the India-UAE treaty will be in trouble.”

At the same time,

tax exemption

for foreign pension funds has been simplified by providing relief even though they may be exempt under their domestic (overseas country) tax laws.

The intent to define the term ‘liable to tax’ to ensure tax certainty was tucked away in an annexure to the FM’s speech.

The Finance Bill 2021 states: “The term liable to tax, in relation to a person, means that there is a liability of tax on that person under the law of any country and will include a case where subsequent to imposition of such tax liability, an exemption has been provided.” The proposed amendment applies to financial years 2020-21 and the subsequent years.