The Hindu Business Line : Resident but not ordinary resident: Taxing definitions

WITH the second Pravasi Bharatiya Samaroh round the corner, India Inc's pitch for a rethink on the definition of resident but not ordinary resident (RNOR) — a category of residential status for income-tax purposes — may become all the more relevant. The call for going back to the earlier definition comes at a time when dual citizenship to non-resident Indians (NRIs) is in the offing and plans are afoot to attract the `Pravasi Bhartiyas' to make investments.

RNOR is a transitional resident status for people who have come back to India after a period of non-residency. For those with RNOR status, only income earned in India is liable to Indian income tax. Thus, so long as an individual is in RNOR status, his income accruing outside India will not be taxable here.

As per the earlier definition of RNOR in the Income Tax Act (prior to the Finance Act 2003), the section on RNOR was interpreted to mean that a person who has been non-resident for more than two years continuously would on return, be entitled to RNOR status for nine years and thus for nine years only income accruing in India would be taxable here.

However, the Finance Act 2003 changed the definition of RNOR. Now persons who have resided abroad continuously for nine years or have been physically present in India for less than 730 days in the last seven years, will get the transitional benefit for two years.

India Inc has held that this amendment has major negative effects, as it may discourage NRIs from resettling in India and also discourage MNCs from locating themselves here. It would result in it becoming prohibitively expensive for expatriates to work in India. "It is not clear as to why such a change has been carried out when the Indian Government is taking all steps to attract NRIs," a Federation of Indian Chambers of Commerce and Industry (FICCI) official said.

The official maintained that it would be in the fitness of things that status quo-ante be restored in regard to the definition of RNOR. The official cited the case of those software professionals returning from the US to India with less than nine years of non-residency and not matching the second criteria either. He pointed out that they would have to think twice as they would be liable for tax of approximately 31.5 per cent on the income earned in their US pension account and on any other savings they have there.

"No doubt this will be subject to double taxation relief, but for items such as individual retirement accounts, which are tax-deferred in the US, double taxation relief will afford no benefit since there is no taxation at the other end," the official said.

In fact, the need to restore the earlier definition of RNOR has also been raised in the chamber's pre-Budget memorandum to the Government.

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Resident but not ordinary resident: Taxing definitions