Thursday, January 18, 2007: Confusion over tax paying liabilities of Indians serving in the UAE is likely to be sorted out between the Indian and UAE governments shortly.

The burning question is: Does the Indian working in the UAE enjoy the privileges of the India-UAE tax treaty even if he is not paying tax there?

Does the India-UAE tax treaty benefit the Indian employed there? Along the lines of the India-Mauritius tax treaty, the right to tax is solely the privilege of the resident country. Capital gains are not subjected to tax in the UAE.

As per the India-UAE tax treaty, a UAE resident earning profits from his investments in India, only the UAE government can impose a tax on him. The resident is not liable to pay any income tax in the UAE since there is no income tax in force there.

The security transaction tax provides for exemption of tax on long term capital gains from equity shares in India. However, short term investments of less than a year invite capital gains tax in India.

The question therefore remains whether the treaty provides for Indian residents in UAE where there is no tax on income and capital gains.

The tax treaty applies to individuals who reside in any one of the two countries. The individual’s domicile status defines his being a resident of either the UAE or India.

Taking the case of M.A.Rafique, the Authority for Advance Rulings (AAR) held that he was eligible to enjoy the privileges of the tax treaty, and that he was not liable to pay capital gains tax in India. The ruling observed that the objective of the tax treaty was to encourage NRI investment in India, and that the UAE Government could take a call on capital gains made by UAE resident investors.

On the other hand, the AAR gave the term liable to tax a different connotation, and equated it with the term subject to tax in the Cyril Pereira case. Since no taxes are paid in the UAE, the applicant Cyril Pereira was not considered a tax resident of that country and was therefore entitled to benefits of the tax treaty.

The Supreme Court ruling in the Azadi Bachao Andolan case did not accept that the issue of double taxation can arise only when tax is actually paid in one of the countries. This ruling contradicts the AAR ruling, according to the Mumbai Tribunal, which followed the precedent set by the apex court in the Assistant Director of Income Tax Vs.Green Emirate Shipping and Travels case.

The India - Saudi Arabia tax treaty states that an individual residing in Saudi Arabia for more than 183 days is a resident of that country, and therefore not liable to tax there.

Clarity of these issues by the Indian government is urgently needed for NRIs working on their investments.