The government on Sunday clarified that the proposed tax on NRIs will not apply on bonafide Indians working in tax-free foreign countries and is intended to tax only those seeking to escape tax by exploiting their non-resident status.

Finance Minister Nirmala Sitharaman in her Budget for 2020-21 had proposed to tax Non-resident Indians (NRIs) who do not pay taxes in any foreign country.

This provision raised anxiety in minds of those working in the Gulf region where countries don't tax income earned by individuals.

First Sitharaman clarified that only Indian income of NRIs is proposed to be taxed under the new provision, and later the tax department issued a statement to say that "the new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries".

The Union Budget for 2020-21 presented on Saturday had tightened the screws on those seeking to escape tax by exploiting their non-resident status. While earlier it was possible to be classified as a non-resident by staying out of the country for 183 days or about six months in a year, this has now been, in effect, enhanced to 245 days.

In an interview to PTI, Revenue Secretary Ajay Bhushan Pandey said the new rule was "an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working overseas".

He said the wording in the Budget document may have created confusion and so a clarification has been issued now.

"What we are doing now is that the income of an NRI generated in India will be taxed here. If he's earning something in a jurisdiction where there is no tax, why will I include that into mine that has been generated there," Sitharaman told reporters here on Sunday.

She said Indian earnings of NRIs such as rental income from property in the country is what was intended to be taxed by way of the new provision.

"Whereas if you have a property here and you have rent out of it, but because you are living there, you carry this rent into your income there and pay no tax there, pay no tax here ... Since the property is in India, I have got a sovereign right to tax," she said in a post Budget interaction with media.

"I am not taxing what you're earning in Dubai but that property which is giving you rent here, you may be an NRI, you may be living there but that is revenue being generated here for you. So, that's the issue."

Pandey said Indians working in the Middle East, as well as those in Merchant Navy, will not be taxed using the new provision.

"Somebody who is a citizen of India and sitting in a tax haven and not paying taxes then he has to pay tax," he said. "By issuing clarification, we have kept them (workers in the Middle East) out. Same for merchant navy because their income is also not arising out of India."

Asked if raising the duration of overseas stay to qualify for NRI status would not deter Indians from making visits home, he said: "These are anti-abuse provisions. If someone faces any difficulty because of this, we will see what can be done. The policy that you make, you have to see that a larger section of people is benefitted because of this. If he is a non-resident, he has to live substantially out of India. Now, substantially out of India means what? Earlier it was 50:50. Now we have made 2/3rd: 1/3rd."

He said the new provision was brought in because people were taking advantage of the existing one. "These are the anti-abuse provisions, and not to inconvenience any genuine persons."

The Central Board of Direct Taxes (CBDT) in a statement said the new provision is not intended to include those Indian citizens in the taxation net, who are bonafide workers in other countries.

An "Indian citizen shall be deemed to be resident in India if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low or no tax jurisdictions to avoid payment of tax in India," it said.

"The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries," it said.

It stated that it was not correct to say that those Indians who are bonafide workers in other countries, including in the Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there.

"In order to avoid any misinterpretation, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Necessary clarification, if required, shall be incorporated in the relevant provision of the law," it added.

At present, if an Indian or a person of Indian origin managed his stay in India such that he remained a non-resident in perpetuity, he was not liable to pay tax on his global income in India.

The Union Budget has proposed to introduce a deeming provision that every Indian citizen who is not liable to tax in any other country, by virtue of his domicile or residence, shall be deemed as a resident of India. Consequently, his global income would be taxable in India.

Tightening the residency provisions, the Budget also proposed to reduce the period of stay in India to 120 days from 182 days earlier for persons of Indian origin (PIOs) to be categorised as non-resident Indians (NRIs).