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NRI’s focus must be on defining their status back home
This article is authored by CA Sanjay Kumar Agarwal, managing partner, DSRV and Co LLP, Chartered Accountants, Gurugram.
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A few years ago, a professional returned to India after spending two decades abroad, owing to his family circumstances. He had built a strong client base abroad and saw no reason to leave it, so he continued working for the same clients, from India. Invoices were raised, the way, as always. The clients paid him the way they always had, into the account abroad.
He filed his tax returns in India every year, declaring the rental income along with other income he earned here. He ticked the box marked Non-Resident Indian (NRI), and thought no more about it. He continued paying tax abroad as always, without giving a thought to the fact that there were any other aspects to consider.
After five years, when his case was examined properly, he was subject to notices, and penalty, etc.
Where did he falter? Apparently, he did no wrong; then what went wrong that he faced a penalty?
How a box ticked as NRI made him subject to issues spanning four separate laws.
Two residences, not one! He assumed "resident" means one. In Indian law, it means at least two, and the two do not begin on the same day.
For income tax, residence is arithmetic. If, as an NRI, you spend 182 days or more in India in a financial year, you are a resident for that year. Your intention is irrelevant. So is your visa, your foreign permanent residence, and where you privately consider home to be. The status also attaches to the whole year. So, his status had changed from NRI to Resident.
For exchange control, the law that governs foreign currency, overseas accounts and money crossing the border, residence works on your purpose of coming back. So, if your purpose is employment, a business or a stay of uncertain length, you become a resident from the day you land.
Both situations hold good, about which he was unaware.
The account needs to be re-designated. Most people who have worked abroad hold an NRE account, which is tax-exempt, a big advantage for any NRI. But this exemption is tied to the exchange control definition of residence, not the income tax one. The day you become a resident under exchange control law, which is the day you arrive if you have come to stay, the exemption ends. Hence, your bank account should have been re-designated as a resident account, or converted into a resident foreign currency account, at once.
Where the money lands is not the question? The second misunderstanding runs deeper. Tax follows the work, not the money. If you are sitting in an Indian city, working for a foreign company and earning income here, and your invoice is in dollars, or that payment went into an account you have held abroad for twenty years and never touched from here, the statute charges income received in India and, quite separately, income that accrues in India.
Many NRIs get it wrong because of the understanding that money outside India is not in the purview of Indian taxation.
What is the Catch here? Once the income is Indian income, it should have been declared and taxed, with advance tax paid through the year. Once you are ordinary resident, your overseas bank accounts and investments must be listed in the foreign asset schedule of your return, and the penalty for omitting them is a flat ₹10 lakh penalty a year, whatever the account holds.
Because services rendered from India to a foreign client are an export, exchange control requires the earnings to be brought into India within a prescribed period, and money left sitting abroad attracts penalties calculated as a multiple of the amount involved. It is because you are supplying services from India that goods and services tax registration becomes compulsory.
How do three factors converge here? The first is remote work, which has made it easy to live in one country and earn from another. The second is that several Indians who went abroad in the 90s and 2000s are returning to India, often for family reasons rather than planned ones, without considering the length of stay here. Uncertainty about the length of stay feels like a reason to leave things as they are. In law, it is the very fact that makes you a resident. The third is information access to your residential and financial status by the Government of India. India now receives financial account details automatically each year from more than a hundred countries, which are being uploaded into the taxpayer's own annual statement.
What are the learnings here? If you are coming back, or you are back, these things are worth considering: Count your days from your passport, year by year. Ask two questions: Am I a resident for income tax? Am I a resident for exchange control? Inform your bank that you are home.
Remember, in your situation, you can’t evade anything, so act fast and, if this has happened, take the help of a professional law firm specialising in handling such cases.
(The views expressed are personal)
This article is authored by CA Sanjay Kumar Agarwal, managing partner, DSRV and Co LLP, Chartered Accountants, Gurugram.
