Non-Resident Indians (NRIs) in general and New Zealanders of Indian origin in particular have evinced great interest in the Indian Government’s proposed Direct Tax Code (DTC).
Their interest is primarily about the tax implications of Indians visiting India and treated as a Tax Resident for income tax purposes, if their stay meets the threshold prescribed in the new DTC.
Taxation in New Zealand and India is based on the two basic rules. The first is the ‘Source Rule,’ which implies that income will be taxed in the source country. The second rule relates to the Tax Residency, which means an individual’s income will be taxed in a country in which he or she is a tax resident.
The Present Law
Under the provisions of Indian Income Tax Act 1961, an individual’s income is taxable based on their residential status in India, determined on the basis of that person’s stay in a current financial year (from April 1 to March 31) and the preceding ten financial years.
A person is treated as a tax resident, if he or she is in India for 182 days or more during a financial year; 60 days or more and for 365 days or more in the four preceding financial years. If none of these two conditions is met, then the person is treated as a Non-Resident.
A tax resident is further classified as a Resident and Ordinarily Resident (ROR) or Not Ordinarily Resident (NOR).
A person is classified as a NOR if he or she has been a non-resident in India in nine out of the ten preceding years; and if he or she was in India for 729 days or less during the preceding seven financial years.
Generally, a person who is classified as ROR is taxed in India on all the income from any part of the world. But in the case of NOR, any income earned outside India would not be taxable in India.
The Proposed Changes
Under the proposed Direct Tax Code Bill, the concept of NOR and the provision of stay of 729 days or less would be removed. Thus, a person’s status as a Tax Resident or Non-Tax Resident will be based on his or her stay in India.
If a person is in India for 60 days or more in a financial year and 365 days or more in the four preceding financial years, then he or she would be treated as a Tax Resident and all worldwide income would be taxable in India.
The New Clause in DTC will oblige all NRIs who frequent their native country pay more taxes on their worldwide income.
The DTC and a Discussion Paper was released in August 2009 for public comments. According to reports, the Indian Government has received a number of suggestions.
New Zealand Tax Residency
The rules for determining Tax Residency in New Zealand prescribe two tests.
The first, the Physical Presence Test, stipulates that a person who is present in New Zealand for more than 183 days in aggregate in any 12-month period would be deemed a resident from the first day of presence.
The second, the Permanent Place of Abode Test, stipulates a tax regime irrespective of the fact whether a person has a permanent place of abode overseas.
Thus, an individual may be successful in avoiding the Personal Presence Test of 183 days, but he or she could be liable for tax under the Permanent Place of Abode Test.
This has wider connotation, taking into account factors such as length of time spent in New Zealand, accommodation arrangements, employment history and taxpayer’s family and financial ties in this country.
Based on the Tax Residency Rules of New Zealand and India, it is possible that a person is treated as a Tax Resident of both countries and consequently income derived could be taxed in both the countries.
This is the reason for a Double Tax Agreement (DTA). One of the primary aims of the DTA is to resolve common double taxation problems. DTA are entered to resolve a situation in which a tax resident of one country derives income that has a source either wholly or partly in another country.
Under the New Zealand’s Income tax rules, DTAs are paramount and effectively overrule the provisions of the Income Tax Act 2007.
DTA with India:
Article 4(2) of the DTA between New Zealand and India stipulates that if an individual is a resident of both New Zealand and India, his or her status will be determined as follows:
The individual will be deemed a resident of New Zealand or India in which he or she a permanent home; if the person has a permanent home in New Zealand and India, he or she will be deemed to be a resident of the country with which his or her personal and economic relations are closer (centre of vital interests)
1. If the country in which he or she has his or her centre of vital interests cannot be determined, or if he or she has no permanent home available in either country, he or she shall be deemed a resident of the country in which there is a habitual abode
2. If the person has a habitual abode in both countries or in neither of them, he or she shall be deemed a resident of the country of which he or she is a national
3. If he or she is a national of both countries or of neither of them, then the competent authorities of the Countries shall settle the question by mutual agreement
Based on the above, the tax residency status of a person is determined and the income is taxed considering the provisions of DTA and the domestic tax law.
Each component of an individual’s income should be examined in respect of the provisions of the DTA to claim the necessary relief. This could raise tricky issues. Readers should therefore seek professional advice.
Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz), with offices at Level 1, 208 Great South Road, Papatoetoe, Auckland. Telephone (09) 2792987.
The above article should be considered only as a guideline and not a specific advice. Mr Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.
