NRIs may regain tax sop

Proposal to offer a 9 year grace period to NRIs.

The Centre is re-looking at the tax status of non-resident Indians (NRIs) who have returned to India for good.

The United Progressive Alliance (UPA) government is likely to re-introduce the nine-year period in which a returning NRI is classified as "a resident but not ordinary resident (RNOR)", said sources close to the development.

If the proposal is approved, returning NRIs will not have to disclose or pay tax on their global income till the ninth year of permanent residency in the country.

"The government is looking at a proposal to offer a minimum of 5 year grace years to NRIs and a maximum of 9 years," senior officials told Business Standard.

The previous BJP-led government had in the Union Budget for 2003-04 withdrawn the five-decade old benefit granted to RNORs when it reduced the cooling period from nine years to two years.

As a result of the changed norms, NRI deposits have fallen significantly, senior officials at PricewaterhouseCoopers (PWC) said.

From April 1 this year, returning NRIs are liable to pay tax on their global income if their presence in the country qualifies them as residents for the previous two consecutive years.

The rule also is applicable to expatriates who come here for more than a two-year term. They would now have to declare their global income and pay tax on it, pointed out Anil Harish, advocate & tax consultant at D M Harish & Co.

"No one will come and settle in India unless the regulation is relaxed," said Ismail Hukkawala, president of the Indian Business & Professional Council that represents the interests of the 6-lakh business community.

As an RNOR, the tax paper need only pay tax in India on income derived within the country, and not on his overseas income unless it is derived from a business set up or controlled in India. Earlier an NRI could avail of RNOR status for nine years after having been declared an NRI for a period of two years, said Harish.

India is the only country which has created a special tax status for RNOR. This dates back to pre-Independence days when the British Raj found it difficult to send Britishers to work in India.

As a means to enticing them, the British created a class of "not ordinary residents," who for a period of nine years would not be liable to pay tax on their overseas income while in India.

The rule was continued after Independence where the benefit was extended to NRIs as many had settled overseas and were not keen to return fearing the high tax liability on their return.

NRIs and expatriates can take some reprieve from the double taxation avoidance agreement India has signed with a number of countries.

"While our counterparts in the US get the benefit under the double taxation avoidance agreement, people from Dubai do not since there is no question of paying tax in the UAE," pointed out Hukkawala.