Impact of “Deemed Resident” Provisions on NRIs in the GCC Countries

The “deemed resident” provisions can have significant impact on the NRIs in the GCC as individuals are not subject to income tax in the GCC countries. The impact arises from the interpretation of the term “liable to tax” used in the proposed deemed resident provisions. 

 The Supreme Court in the case of Azadi Bachao Andolan distinguished between “liable to tax” and “subject to tax”. The Court observed that liability to taxation is a legal situation whereas payment of tax is a fiscal fact. For the purpose of determination of residence, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. In other words, irrespective of whether or not the GCC Government levies taxes on individuals, once the right to tax GCC residents vests only with the GCC Countries, that right, whether exercised or not, continues to remain exclusive right of the GCC Countries. In such a context, NRIs in the GCC can take a view that deemed resident provisions would not apply to them. However, considering the ambiguity in the provision, it is recommendable for any tax resident NRIs from any of the GCC countries to obtain an advance ruling to get more clarity on this aspect.

 But in either situation, in order to prove residency in the other country, an NRI would be required to provide a Tax Residency Certificate (TRC) from the competent authority of the other country in which the person is a resident. At present, there are some practical difficulties in obtaining a TRC from the GCC Countries.

Tax Residence in the GCC               

CountryResidency Condition
BahrainNo tax treaty with India
UAEIndividual present in UAE for at least 183 days in the calendar year
KuwaitIndian national present in Kuwait for at least 183 days in the fiscal year
Oman, Qatar, Saudi ArabiaResident of a contracting state means a person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
India has not entered into a tax treaty with Bahrain. Therefore, a person residing in Bahrain, who is deemed as a resident in India under the new residency conditions, would not be able to claim any treaty benefit of residence-based taxation. However, NRIs based out in Bahrain should manage to obtain TRCs from the Ministry of Finance on a safer side to prove their tax residency in Bahrain.

Our Thoughts

The deemed resident provisions tend to discriminate amongst NRIs as an NR who is resident in the GCC but are not subject to tax in that country by virtue of domestic law of that country would be conferred a different residential status. 

 Consider the below situation: 

ParticularsPerson APerson B
Country of residence
Period of stay in India in FY 2020-21
Less than 120 daysLess than 120 days
Indian IncomeExceeding Rs. 15 lakhsExceeding Rs. 15 lakhs
Residential StatusNot Ordinarily ResidentNon-Resident

Both persons earning the same income and visiting India for the same period is conferred different residential status based on their country of residence. Moreover, considering the difficulties in obtaining a TRC, the Government would need to reach an understanding with the Government in the GCC countries regarding issuance of TRC. On a combined reading of all the residency provisions, it would be advisable for NRIs with Indian income exceeding Rs. 15 lakhs to plan their visit to India in such a manner that their average stay in India in a year does not exceed 3 months.

Disclaimer: The views / the analysis contained therein do not constitute a legal opinion and is not intended to be an advice. Readers of this document are advised to seek their own professional advice before taking any course of action or decision, based on this document.

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