A TAX-FREE SALARY IS THE BIGGEST attraction of working in several Gulf countries, which is why year after year, legions of Indians head to these small, hot, arid countries in search of jobs despite many having to leave families back home due to stringent visa rules.
The latest Budget almost dashed the hope of uncut salary cheques, initially suggesting that Indians who work in tax-free zones must pay tax in India, although the Government soon issued a clarification after a flurry of discussions in the upper echelons of power. “The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct,” it said in a press release.
As of now, NRIs who stay for more than 120 days a year in India will have to pay taxes here. Earlier, the figure was 182, meaning you could avail of the non-resident Indian (NRI) status by staying six months of a year outside India. An NRI tag meant that you could remit money to India from abroad without paying income tax on it.
Why did the Government bring down the number of days an Indian can stay home to 120 days from 182 earlier? What are the possible gains of such a move made in this year’s Budget?
Professor Irudaya Rajan of the Thiruvananthapuram-based Centre for Development Studies, who is a noted economist and a specialist in migration, laughs off this measure as an “ineffective one” if the aim of the Centre is to check money-laundering or to earn money from those who overstay. “These businessmen will now adjust their calendars not to stay in India for more than 120 days. Other than making things cumbersome for them to do their business and restricting their mobility, this will achieve next to nothing,” he asserts, emphasising that to create a better investment-friendly environment, one has to lift such hurdles for mobility.
Union Budget 2020 proposed ‘to reduce the time of stay in India from 182 days to 120 days for an Indian citizen or person of Indian origin to become resident in India. Consequently, it is proposed to relax the provision of ‘resident but not ordinarily resident’ so that a resident who has been non-resident in seven out of ten previous years would be resident but not ordinarily resident.’ Primarily, the Government seems to be concerned about cases of high net-worth individuals misusing the earlier provision to remain an NRI in perpetuity so that they don’t have to declare their global revenues in India and pay taxes on them.
OV Mustafa, a Dubai-based Indian businessman, concedes that there could have been instances of abuse of the earlier provision by Indians, but not exactly resident immigrants, staying away from India for over 182 days to claim an NRI status. He adds, “Many prominent businessmen, professionals and actors are the main abusers of the current system. I have also heard that in the past, such persons would fly out of India, re-enter via Nepal and claim they stayed away.”
He disagrees with a law being introduced to prevent such malpractices, which ought to be tracked by agencies that detect financial crime. “It is like using a sledgehammer to kill a fly,” opines Mustafa, who is also the vice chairman of Overseas Keralites Investments Holding, set up by the state government to attract investment from non-resident Keralites. He is also a director of the Kerala state-run Norka Roots, an agency that works for the welfare of Malayalis abroad.
For her part, Ravindra Kaur, associate professor and director of the Centre of Global South Asian Studies at the University of Copenhagen, who is also the author of Brand New Nation: Capitalist Dreams and Nationalist Designs in Twenty-First-Century India, says that such measures as restricting the number of days for an NRI to be in India cannot be a substitute for the work that has to be done by law-enforcement agencies. “I don’t see any logic in that move,” she asserts. At the time of going to press, no response was available from the office of Revenue Secretary Ajay Bhushan Pandey.
Although analysts from EY India and others have claimed that high net-worth Indians will find it more difficult to evade taxes by travelling in multiple countries, a taxation expert with another MNC contends that the Government is not “listening to all sides before taking a decision on these aspects.” Neither does he see any reasoning in restricting the stay of a businessman who brings in his money to India and pays tax for his local businesses and investments. “Entrepreneurs in Kerala, Tamil Nadu, Gujarat, Karnataka and many such states who do good business in the Gulf countries and meticulously plough back their money as investments in India will have a tough time in terms of managing their operations. In Gujarat, several of these billionaires from the region and also from other locations in North Africa and elsewhere pump in money to their villages out of love for their families, homeland and culture. We cannot ignore their patriotism and association with the country and their hometowns,” he explains.
Open had earlier featured the town of Madhapar in the desert region of Kutch, which is one of Asia’s richest towns in terms of per capita bank deposits, many of whose residents earn money, besides other countries, from the Gulf region (‘The Affluent Society’, November 16th, 2015). The story is true of many well-to-do businessmen from across India who strike it rich in the Gulf region, taking advantage of the friendly tax regime and business opportunities. Unlike from other parts of the world, where most Indian-origin people are citizens of the countries they work in and spend a large chunk of their money in those countries, tycoons and high net-worth individuals and others from the Gulf region prefer to park their money back home in India since most of these countries do not offer citizenship even to long-term residents. Most NRIs in the Middle East are acutely conscious of the fact that India is home once their moneymaking days are behind them.
Professor Rajan is right in saying that a majority of those migrants in the Gulf who work in the services industry and earn salaries are unaffected by the Indian Government’s new move. Yet, what the MNC consultant insists is that those who are flush with funds will feel the heat because they may want to spend more time in fast-tracking their projects in India, which is notorious for its slow bureaucracy. “The red tape means that businessmen will definitely wish to stay for longer periods to get clearances that require their direct supervision,” he adds. “This amounts to a clear discrimination,” he points out. India receives $80 billion in remittances every year from abroad, a huge chunk of it from the Middle East. By World Bank estimates, the figure (yet to be announced) would be $82 billion in 2019.
$82 billion remittances to India in 2019 (source: World Bank estimate)
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Notwithstanding the Government’s claims to the contrary, some states are more worried about others as far as this amendment is concerned, which could come into effect from March 1st. Entrepreneurs fear that rather than being able to keep a tab on people parking money in tax havens, the new move would most likely lead to unnecessary hassles for them. While some of them say that many Gujarati businessmen have already started looking to invest in other countries, including in the African continent, VK Ashraf, Dubai-based businessman and philanthropist who has huge business interests in India, says that others may also follow in their footsteps if the business-friendliness towards Gulf-based NRIs shows drastic signs of a dip.
A Mangaluru-based businessman and a prominent figure in the Kannadiga community in Dubai tells Open that he is disappointed by this move of the Government. “Why should we pay for the lapses of our enforcement
agencies? People who want to park money in tax havens and evade taxes use different ways to do it. Making people stay for fewer months in the country is not a viable method at all,” he rues.
OV Mustafa, partner at Gargash Insurance who spoke extensively to Open, argues that the direct impact of this new rule for a state like Kerala—from where there are over 2 million NRIs in the Gulf region—is going to be huge. He explains, “Such NRIs do not have permanent residency in the Gulf states, and up until recently, they could not even own properties or 100 per cent of their businesses in these countries. Such an ecosystem has indirectly benefited our state (Kerala) as the surplus savings of this community (it is estimated that over Rs 140,000 crore are in banks in Kerala as deposits from them) is ploughing back into the state as investments in real estate, healthcare, education, tourism, retail, and so on.”
He points out that such people have no option but to visit Kerala as well as other states to get involved in their ventures at various stages (including setting up, running the business, and so on). As someone who has watched the trend closely, he avers, “Most of these are entrepreneurs and small business owners in the Gulf region. Knowing how slow things are in our system, they have to spend weeks in sorting out their business-related activities.”
Mustafa adds that such entrepreneurs also mingle in a social circle in India and are often expected to be there for social events. This is, in fact, a trend that you see all the way from Coimbatore in Tamil Nadu
and Thrissur in Kerala to Kutch in Gujarat to Jalandhar in Punjab and Malda in West Bengal.
Businessmen and diaspora leaders, like Mustafa, seek to remind the Centre that NRI businessmen who park their money in the country file their income tax returns on their taxable income in India, a fact that is often taken lightly. “They have legal resident status in Gulf countries. So the question a Gulf-based NRI is posing is: what difference does it make if he has to stay for 240 days in India? The more he stays in India, the more he invests here and the more he spends here,” he reasons. The challenge, therefore, Kerala will face, he prophesies, is that the NRIs in the Gulf region will be “more circumspect” in investing in the state as they will have limited time to manage their investments. “At a time when the government of Kerala has taken major steps in facilitating ease of doing business through various changes in regulations, this rule if implemented, will be a big blow to the state’s initiative,” he says. As someone directly involved with the mobilisation of NRI investment in Kerala and having interacted with NRIs in the Gulf on the subject, Mustafa says he is “genuinely concerned about its impact on our state’s economy and development.”
These worries, as Open discovered, are not restricted to Kerala alone which gets close to 20 per cent of foreign remittances a year, but much beyond, even in Gujarat, Punjab and Uttar Pradesh. Nitin, a Delhi-based entrepreneur and jeweller who launched his Dubai operations following the demonetisation exercise of November 8th, 2016 and who prefers not to give his full name, says, “We do pay hefty taxes for our India business. Our Dubai business is just starting to look good and our work involves a lot of travel and spending time in India. I am totally crestfallen about the decision. I will look for other ways to cope with such a measure if the Government goes ahead and implements it. Most often, decisions are taken without inquiring into factors that help in improving business environment. A businessman does not work in a vacuum. He provides jobs and income to hundreds of others too. The Government is behaving as if all NRI businesspersons are tax evaders. The main reason we look outside India for opportunities is due to the hurdles we face constantly in the country, from demonetisation to complex export-import policies to poor GST implementation.”
Although Nitin is not planning to shift his money out of India immediately, he says he knows others who are contemplating it. “It’s not good news for India if entrepreneurs start investing in other conducive locations at this point of time when the country needs more investment to generate jobs for the youth,” he states.
Clearly, the Government has earned the ire of a large section of NRI businessmen who also contend that they are made to pay a huge price for the shortcomings of its investigative agencies. Some businessmen suggest that this is a mini-demonetisation exercise, although at least two MNC consultants tell Open it is too early to be overly pessimistic about it. “The Government should have placed greater stress on consultations before making policy announcements,” admits one of them. At a time when the economy isn’t looking so good, being unfriendly to Indian businesspersons and creating hurdles in doing business does not bode well.