In this video, Abhinav is explaining finer tax rules on digital nomad taxation in India which can be helpful for freelancers & enterpreneurs.

Video transcript (kindly note auto-transcript can contain errors)

Hello, this is Abhinav, and I welcome you. In this video, I’m sharing some, pointers for digital nomad taxation in India. Okay.

So now what is happening is that, nowadays, lot of people, are you know, there is this trend that people are working as digital nomads. Now it is a lifestyle choice for many people because now technology has enabled everything. You can be in one place and do the work from other place. And because of the use of technology, you can be at many places, you know, and do the work. There’s no kind of compulsion that you have to be at one place to do your work.

Right? And because of the collaboration tools and all that are available, there can be a team which is working from, like, 5 different countries, and they can do that work. And they can also work from another 5 different countries. Right? So the work doesn’t get impacted because of technology.

Right? Now what is happening is that the tax law of the various countries, right, and the, the UN and the OECD model convention, they have not kept pace with this kind of a work arrangement. Right? Because they are still kind of, you know, having this thing that the primarily, they focus on the resident based residents based taxation. Right?

That if you are working in India, then India has the right to tax. If you are working in USA, USA has the right to tax. So that’s still the tax laws have not, you know, tried to kind of, catch up with this kind of a work arrangement. So what basically these digital nomads do is that they keep traveling different countries. And when they travel different countries, they try to escape the tax residency, provision of that particular country.

Right? For example, India has a requirement of 1, 82 days. Right? So they will try to or 60 days. Right?

So they will try to reduce their stay in India, so that they do not cross that threshold. They move to Sri Lanka, then they move to some other country. Right? And this is how they try to structure so that they end up not paying tax in any country. Now there is ethical question, whether this approach is right or wrong.

Right? And then those ethical questions are also there. So in this video, basically, I’ve just tried to kind of summarize some of the my points, in coming across such clients, and it is a very gray area, and it’s evolving area. But some points, I’m trying to share with you. So they what they do is that they choose to stay in countries with relaxed tax res residency.

Now there are a lot of countries which are coming with digital nomad visa. Right? I think Estonia, Croatia. These countries have dedicated, visas for people who are like digital nomads, which has a significant, visa fee, but they allow you and they do not you know, they have relaxed tax residency requirements. So these people, they prefer, working from those countries.

Right? Now understand there is a difference between digital nomads and remote workers. See, digital nomads are people who travel from country to country. That’s like for some people, it’s a lifestyle choice also. For other so for some people, they basically want to evade tax.

That’s why they do it. But remote workers is different. Right? Remote workers is basically a person who is in India working for a US company, right, who is based in India, but he is working remotely for a US company. I’ve also made a video on taxation of US salary income in India.

So for those kind of cases, you can check that video. Okay. So that is different. Digital nomads, remote workers. Now as I said, the taxation rules of individual countries and the UN OECD model conventions of DTA are still, you know, primarily, they are residence based taxation.

So it’s basically saying that if a person is working in India, for a US company, as long as he stays in India, he is working in India, India will have the right to tax. And then there are some, exceptions to it in the DPA. So they basically still focus on this thing that, you know, if you work in India, stay out of it, stay off of out of a particular country, I will have the right to tax. But what about cases where person is traveling, right, in different countries for the same work? Right?

So the tax laws are yet to catch up. Now for the tax professionals, since it’s a gray area see, as a tax professional, all those tax professionals, maybe anyone who is watching it, see, there are you’ll find cases of people like these digital nomads. Some of them, I’ll not say all, they are more focused on strategies to not pay tax on the income in any country. Right? Now there are see, ethically, in my view, this approach is incorrect.

Ethically, it’s wrong. Right? They what they try is to, you know, find out countries which have a lower tax residency so that they don’t pay up the tax in any country. Now understand. Proceed with caution.

You are not, like, kind of advising from the client’s point of view also only. If you are registered, like, if you’re a practicing chartered accountant, you have to also see the law, which is, you know, as a impartial. Right? So proceed with caution. Get all the facts from the client first because sometimes how they structure, the people who come to you, they structure it in such a messy way without, someone advising them something.

Like, I got a, like, case you know, someone. He had a LLC in US, and the guy was billing it from India. Right? And then he was thinking that I will not pay tax in US. I’ll not pay tax in India.

So I advised him properly. So first, get all the facts first, how they are invoicing, what is the you know, is there a fixed place PE in India? Right? All these things that you check. Now be careful.

You don’t want to kind of end up, conniving end up being construed as conniving with the client that you’re helping him evade tax. No. Because if you do that, then you have a liability towards the regulatory body also. So be very clear. Advise them.

Pause them that it’s a very risky thing if you want to do. Various countries are trying to kind of increase their scrutiny on those these kind of things. Right? So caution them and, and, especially be careful of people who just don’t want to pay tax in any country. So then at the end, if they are still adamant and then you can even decline the assignment, in my view.

Right? So be careful while dealing because it’s a gray area. Right? Okay. Now and also tell them it’s totally interpretation based.

Right? Because the tax department may have a totally different view on this kind of arrangement that you have done. Right? So that that risk will always be there. Right?

Okay. Now what are the taxation rules? Now let’s come to the taxation rules in India. Right? Now, if you stay 182 days or more of, in India, the worldwide, you qualify as a resident, and the worldwide income is taxable in India.

Right? Now even stay in parts if you are a digital nomad and you it’s not a, like, a 182 discontinuous stay. Even if you stay in parts, it gets counted for the 182 days. Now if you say that I am not there in 182 days in India, so I’ll be a nonresident. No.

Still, 60 60 slash 365 days rule applies. So 60 days in the previous year and 3 65 days in the previous 4 years, if you are there in India, still, that is so it’s not 1.82 days. It’s also the 60 day rules also needs to be checked. For example, there is a person who says I’m a digital nomad, and then if you actually see that person was in India only for the past 4 years. Because if that be the case, you may assume that, oh, he’s been traveling all these countries.

No. Don’t assume. Ask that what about the past 4 years. Right? So past 4 years, 3 65 days, he has been more in India.

So then the limit that you have to check and you do advise him is 60 days. Right? So don’t presume anything. Ask. Now income understand one thing.

If the income of that person in India is greater than 15 lakhs for previous year, then the 60 days rules become 1 20 days. Right? 60 day rule becomes 1 20 days. Actually, this is a flaw by the income tax department. The way they have construed this is a new rule that had come in 2021 around.

So they should have done from from 60. They should have done 30 days. They have actually it’s a, like, a wrong unintended consequence that has happened. Instead of 60, they have done it 120. They have given them that leeway.

Right? So remember, where you also asking about the Indian sources income. If it is more than 15 lakhs, then it is 1 20 days rule. Right? Okay.

Now understand that if the business income now there are few situations. The person still becomes a resident of India, nonresident of India, through the stay days, but you have to also advise, you have to also check that if the business income that is there is from a business connection in India or there is a significant economic presence of that person in India, the income will be taxable in India irrespective of the residential status. This is coming from section 9 of the income tax act, incomes deemed to accrue or rise or income from business connection in India, and rule 11 u d, which talks about the significant economic presence. That means, like, 3 lakh users or 2 crore rupees of payments. Right?

So you also have to advise that this if you may fall into if you fall into this rule, then it is taxable in India irrespective of residential status. Then yeah. If you qualify as a RNOR, only Indian incomes are taxable. But if business connection is there, so then it is taxable, or if the income is directly received. For example, the person has a US LLC, and the person is invoicing from India, and the LLC makes the payment directly to an Indian bank account.

If the if the person is receiving the payment in an Indian bank account irrespective of the residential status, the income is taxable in India. So we have to be careful that you don’t receive it in an Indian bank account. Right? Now very, very, very important provision, which is introduced in 2021, is the deemed residency provision. Right?

And this is where all the digital nomads who want to escape the Indian tax will get stuck. Now deemed residency provision says that if you are an Indian citizen. Now understand that it is only applicable on an Indian citizen. It doesn’t apply to a foreign citizen. Right?

If the person has, like, taken a US citizenship, it this provision will not apply. It’s only on the Indian citizen. Plus, if the income from Indian sources is exceeding 15 lakhs and the person is not liable to tax anywhere else, right, in that case, the person will be constitute deemed as resident in India, right, as a r north. Right? So his income will be taxable in India.

Now understand this. Libor to tax doesn’t mean that the person, faces zero tax. Right? For example, the person has incorporated now in Dubai, UAE, now you have corporate tax, But the, for example, person is in a jurisdiction which has zero tax. So he will not fall into in this.

Right? This is basically intended for people like digital nomads, high net worth individuals who kind of, you know, plan their stay in various countries to skip the tax residency of any country. So they will earn a sizable income of, like, 10 crores, but they do not they do not qualify as a tax resident of any country. So everything gets, you know, tax free. But if the person is an Indian resident, his income in India from Indian sources is more than 15 lakhs.

For example, they have sold a property or, you know, that income is there for exceeding 15 lakhs, they will be deemed as resident and not ordinary resident, and they’ll be deemed as a resident of India. So this is a very important provision that you need to keep in mind. Okay. Then okay. If you qualify as a resident, what happens?

Suppose you your stay increases, like, you from a, you know, stay perspective number of days, you qualify as a ROR, right, of India. So what happens is India will tax all your incomes. Right? So then still there is this possibility that you can check the DTA between India and the originating country from where the income has originated. Generally, if the, the DTA may have any kind of a favorable provision for example, the income is taxable only in USA.

If the entity, has no PE in India, then the income stays taxable in USA. Right? So that, again, you can check that. So my point is that even if you qualify as a ROR in India, still the DTA can give you a relief and you can be taxed in the in the country of origin and not in in India. So that, again, one more thing that can be checked.

Now in India, if you hold a pan in India, always, I advise that please do go ahead and file your tax. File your tax return even if it’s a nil income return because the particular thing is that you don’t want to kind of get notices from the tax department that against this plan, there is no return that has been filed. Right? This is actually silly on part of the, tax department. Just against the panel, if there’s no return, they send a notice, and then you have to reply and, you know, it’s a kind of a hassle.

Right? Better and to maintain continuity, always, always file a I file a pan in India. And, also, from an identity theft perspective, always against a pan, always go ahead and file a return. Right? So that that the return gets I don’t know.

Pan gets locked with respect to that particular year. Nobody else can file a return fraudulently or something. Always best practice, file a return. If you have a foreign income and it is exempt as per the India, US and DTA, you can in schedule EI, you can state it as an exempt income. So your income tax department cannot say that, oh, oh, oh, you did not disclose this income to us.

No. You should give it in Schedule EI. EI stating the DTA clause that it is exempt, why it is exempt, also disclosing the foreign source income, FSI. If you’re a resident, an ordinary resident, also disclosing the FSI. Right?

And, you know, FEMA point of view, like, for example, if you have an uncertain view of you’re not certain to kind of stay back in India and you want to just travel, then you need to convert your accounts, resident accounts to NRO, and you can also open NRE. So, example, you need kind of certain funds which you want to repatriate out of India. You can bring it to the NRE account. We’ll it’ll earn you a tax free interest. So that is something.

Need to convert all your resident accounts to nonresident accounts as per FEMR requirement. Now if, basically, your business involves any supplier of goods and services in India or receipt of funds in Indian bank account, then check for the GST provisions. Right? You may qualify with the GST registration and associated compliances. Right?

Okay. So these are some points on digital nomad taxation. I just thought to share if it may be useful. It’s a it’s a evolving area, developing area. So do share your feedback, your thoughts in the comment section.

Thank you so much for watching this video. Thank you so much. Bye.