Salary received in NRE a/c is not taxable

The Income Tax (I-T) Department has issued a circular clarifying that "the salary paid to the non-resident seafarers for services rendered outside India on-board foreign ships, will not be taxed in India, merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer". (Underlining is mine)

To recap, the issue was that seafarers are who work on ships in international waters and overseas ports are non residents and since the salary accrues overseas logically it should not have been taxed in India.

However, the seafarers who had complete choice on where in the world to receive their salaries, were mug enough to choose to receive their salaries in their NRE accounts in India.

Unfortunately, they did not contend with the provisions of the Income Tax (I-T) Act, which provides that even the overseas income of non residents is taxable in India if it is "received" in India. Since the salaries were being received in the seafarers' NRE accounts maintained in India, the taxmen sought to tax it in India. After several unsuccessful attempts, the tax department succeeded in the Kolkota Tribunal in the case of a seafarer, Tapas Bandhopadhya. That set off a furore, hence this clarification.

This circular does remove a huge burden of uncertainty surrounding the taxation of salary of sea farers received in India. The circular mentions this is a clarification – hence the necessary implication is that this was always non taxable – it has only now been clarified. Thus, it applies to past credits of salaries as well. Unfortunately areas of confusion remain.

Firstly, the clarification should have been accompanied with an instruction to its field officers to concede any appeals pending on this issue, and including dealing with cases such as Tapas Bandopadhaya where the department has won in the Tribunal. It would be very ironical that the man whose case set off the clarification does not himself benefit from the clarification. Secondly, some of the clarifications themselves need further clarifications. Thirdly the clarifications mention the amount is exempt if the NRE account is maintained with an Indian Bank. The term Indian Bank has not been defined anywhere. Does it mean "bank in India" in which case the clarification is fine, or does it mean non multinational bank – which would mean that the amount is exempt if received in an NRE account in say, State Bank of India but not if it is maintained with say, Citibank.

Also, as mentioned in my earlier article, seafarers are not the only people affected by this interpretation of the Act. Many non residents working with multi nationals in African countries or countries such as Russia choose to receive the international portion of their salaries in the Indian NRE accounts. Like the seafarers, they have complete choice where they can get that salary remitted but have consciously chosen to get the salaries remitted to India. In my opinion, they too can take advantage of this circular though it would be much better if there is a specific additional clarification that the benefit of the above circular will apply to all non residents whose incomes accrues overseas but are chosen by them to be received in India.

In fact, it might be the right time to examine the basic concept of taxation of overseas income in India on receipt basis itself. This dates back from the 1922 I-T Act in a world where none of the major currencies were really convertible and hence if you received any income in India it was probably because the earning had a nexus to India. There was no other reason you would choose to receive the money in India. The tax department's idea was to catch on receipt basis what could not be caught on accrual basis. That is no longer true in a globalised world where, at least as far as non residents are concerned, they can receive their monies anywhere in the world. The clarifications are just a band aid solutions to a deeper problem.

It's about time we dropped this pernicious provision that tax amounts are received in India even when earned overseas by the non residents.

A BIG RELIEF

• Overseas income of non residents is taxable in India, if “received” in India, according to the provisions of Income Tax Act
   
• Non residents working with multi nationals choose to receive the international portion of salaries in Indian NRE a/cs