Requirements of NRIs to File Income Tax Returns has Changed After Budget 2020

The Hon’ble Finance Minister submitted Budget 2020 on 1 February 2020 that is built around three popular themes namely- “Aspirational India, Economic Development for All and A Community for Caring.”

In the tax perspective, apart from the reform steps already taken, it focuses on critical aspects such as ‘stimulating growth, simplifying tax structure, making enforcement more straightforward, and reducing litigation.’

The current government has put a great deal of focus on manufacturing in India, supporting start-ups, creating job opportunities, broadening and deepening tax base, tax protection, raising litigation and simplifying tax laws.

What’s In for NRIs?

In areas of regulation ease, one such amendment introduced by the Hon’ble Finance Minister is to extend the exemption in additional cases to NRIs from filing annual income tax returns in India. Specific tax rates were recommended for various income groups under the terms of the Income Tax Act, 1961 (the Act).

An NRI is not currently required to file his income return if his total income consists solely of dividend or interest income, and TDS on such income is excluded under the provisions of the Act.

Nonetheless, NRIs who earned royalties or fees for technical services (FTS) from India were still required to file their income return in India.

The Proposed Rules for NRIs

It is now suggested that an NRI should not be allowed to file income returns in India if:

• The total income includes either dividend or interest income, or royalty or FTS income (i.e. not connected to a permanent establishment).
• Tax on such revenue has been withheld at the levels provided by Section 115A of the Act.

A Good Relief

It is relevant to note that the said relief is only available as per the proposed amendment if tax is withheld at the rates specified by section 115A of the Act [ i.e. 10% plus surcharge and termination of schooling in the event of a royalty or FTS ].

Nevertheless, a taxpayer has an option, as provided for in Section 90 of the Act, governed by the rules of the Act or the applicable tax treaty or whichever is advantageous. 

Many of the tax treaties entered into by India provide a 10 per cent or lower withholding tax rate for revenue earned from royalty or FTS (i.e. not directly linked to a permanent establishment).

Depending on the above, the tax rate provided for under the tax treaty could be lower than the tax rate paid under section 115A of the Act. 

In the said situation, since the withholding tax could be more economical than provided for under section 115A of the Act, a view emerging is that there may not be an exemption from filing the return on income in India in such cases. The NRIs may, therefore, be required to file his tax return in India.

What are the Implications?

Given the above, if an NRI takes advantage of the gain under the tax treaty, the non-resident may be required to file tax returns in India.

It may also be noted that no corresponding reform has been made in the transfer pricing rules. Therefore a non-resident who collects such income from an associate company may still be expected to follow transfer pricing compliances in India.

Therefore, NRIs will have to be informed of the additional requirement and their factual status before making any decision on their India tax return.