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Tuesday, Jan 06, 2004

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`Change in definition of resident status will hit IT professionals'

Our Bureau

New Delhi , Jan. 5

THE change in the definition of `Resident but not Ordinarily Resident' (RNOR) Indians, as effected in the Finance Act 2003, will have severe repercussion on Indian professionals and others who are employed in the software and IT-enabled services (ITES) in the US, according to the Indo-American Chamber of Commerce (IACC).

In a communication to the Finance Minister, Mr Jaswant Singh, the IACC President, Mr V. Rangaraj, has said that the change in the definition of RNOR will have serious implications, particularly on the growing IT segments in India.

Two-way mobility of professionals on a continuous basis is imperative to execute the offshore and onsite projects. This year, of the total targeted IT export worth $ 13.5 billion, the share of the US is estimated to be around 60 per cent.

"That means the two-way travel of the professionals between India and the US in the coming years will have to be more than what it is happening now, especially when we have set a target of achieving $ 50-billion IT exports by 2008," says Mr Rangaraj.

The IACC statement says that in the Finance Act 2003, the definition of RNOR has been substituted with effect from the assessment year 2004-05. This was mainly due to an interpretation of the Gujarat High Court. The new definition stipulates that only persons, who have resided abroad continuously for nine years or who have been physically present in India for less than 730 days in the last seven years will get the RNOR status. Prior to 2003, for those with RNOR status, only income earned in India is liable to be taxed under the I-T provisions.

In the communication, Mr Rangaraj has said that many of the Indian IT professionals working in the US have returned to India after a stint in the US, either to work for Indian affiliates of the US companies or set up their own businesses.

Very few of them have been continuously non-resident for seven to nine years. This would mean that any income accruing to them abroad, including income accrued in their individual retirement account will now be fully liable to Indian taxation from the year of their return. They would be liable for tax at about 31.5 per cent of their income earned in their US pension accounts.

Even those professionals who have a seven-to-nine-year period of continuous non-residency would have to think very carefully in view of the limited transition period of two years. They have to pay income-tax on the whole of their world income after the expiry of two years of their arrival.

This will mean resistance on the part of many highly talented professionals to relocate to India to join the US affiliates in India or to go for their start-ups in India. This will lead to low employment generation and income for the Indian professionals.

The Government may, therefore, consider restoring status quo-ante to the definition of RNOR, particularly when it has taken a decision to extend dual citizenship to the people of Indian origin (PIO), the IACC statement said.

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