Budget 2020 And The Burden Of Indian Citizenship   

Budget 2020: Do Indian citizens residing  and working in the UAE have to pay tax in India because they don’t pay any tax in UAE? 

An Indian passport sits on a desk  in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)  
An Indian passport sits on a desk in New Delhi. (Photographer: Anindito Mukherjee/Bloomberg)  

One interesting proposal in Union Budget 2020 is an amendment to Section 6 of the Income Tax Act, 1961, to say that an Indian citizen who is not liable to tax in any other country or territory, is deemed to be a resident of India. Indian residents have to pay tax on their global income in India.

This proposal has created panic among some Indian expatriates working in the UAE, which does not levy income tax on individuals.

The Bahamas, the British Virgin Islands, Turks and Caicos, Brunei, Cayman Islands, and Monaco are some other countries that do not levy personal income tax. Like these countries, the United Arab Emirates is also branded as a ‘tax haven’. But unlike these other territories, the UAE has a substantial population of expatriate Indian workers. Hence the question: do Indian citizens residing and working in the UAE have to pay tax in India because they don’t pay any tax in UAE?

The fear is misplaced due to two reasons.

First, the provision in the budget is applicable to individuals who are ‘not liable to tax in any other country or territory’. Indians working in UAE are residents of UAE. They are liable to tax in UAE. UAE does not impose any tax; it’s a discretion of UAE.

Secondly, Section 90 of the Income Tax Act states that provisions of the Income Tax Act can override a Double Taxation Avoidance Agreement, only if the provisions are more beneficial to the taxpayer. Otherwise, the Income Tax Act cannot override DTAAs.

Thus, even if the Income Tax Act deems a resident of another country as an Indian resident, it has no effect if the individual is covered by a DTAA. 

India and UAE have signed a Double Taxation Avoidance Agreement in 1992. Article 4 of the DTAA explains who resident in India is, and who a resident in UAE is, under the treaty.

As per the DTAA, an individual who has stayed in UAE for a period totalling in aggregate of at least 183 days in a calendar year, is a resident of UAE. A resident of UAE as per the DTAA, does not have to pay tax on her global income in India. She has to pay tax in India only for specific income arising from India, and as per the DTAA.

What Is The Purpose Of This Amendment?

The memorandum to the Indian Budget 2020, explains the legislative intent behind this amendment. It states that: ‘The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world’.

This amendment targets those Indian citizens who have become ‘stateless’, in order to artificially escape their tax liability in India and elsewhere.

Stateless persons are not tax residents of any country, and thus are not liable to pay tax on their income anywhere.

If the same person stays in UAE for more than 183 days in a calendar year, he becomes a resident of UAE – and is liable to pay tax in UAE. That UAE does not levy tax is a whim of its sovereignty.

Expatriates working in UAE and other foreign jurisdictions can take shelter of DTAA to ring-fence themselves from this amendment. Hence, the apprehension that this amendment may have unintended consequences on them is misplaced.

However, this amendment may still have some unintended consequences. There are many island economies as well as developed economies that offer (or sell) citizenship in return for certain investment in their economy. An individual who goes through the pains of structuring his affairs to remain a non-resident everywhere, may as well purchase citizenship of another country. These individuals are usually highly skilled professionals and enterprise owners who move around on work. India might lose these valuable human resources as its citizens. But then, if a citizen is ready to give up his citizenship to avoid paying tax, why should the country care?

Smarak Swain works in the Foreign Tax & Tax Research Division of the Central Board of Direct Taxes, Ministry of Finance. He has authored the bestselling book ‘Loophole Games: A Treatise on Tax Avoidance Strategies’. Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.