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February 8, 2021

Budget 2021 notifies concessions to OPC’s and NRI’s

by CA Shivam Jaiswal in Budget

Budget 2021 notifies concessions to OPC’s and NRI’s

Finance Minister Nirmala Sitharaman proposed many new measures in the Budget 2021 to prop up the declining economy amid the Covid-19 pandemic and boost spending across sectors. Budget 2021 focused on the seven pillars for reviving the economy – Health and Wellbeing, Physical and Financial Capital and Infrastructure, Inclusive Development for Aspirational India, Reinvigorating Human Capital, Innovation and R&D, and Minimum Government Maximum Governance. Several direct taxes and indirect taxes amendments were also proposed.

The Finance Minister in her third budget speech proposed to incentivised the setting up of a one-person company (OPC) to benefit start-ups. She announced relaxation for non-resident Indians (NRIs). Let us learn more about these relaxations in this article.

Who is considered as NRI under Income Tax Provisions?

It is essential to determine residential status of taxpayer to determine taxability of income earned by such taxpayer. Section 2(30) defines non-resident as a person who is not a resident. Section 6​ lays down the test of residency for different taxpayers. According to Section 6, An individual is said to be resident in India in any previous year, if he:

  • is in India in that year for 182 days or more; or
  • within the 4 years preceding that year was in India for 365 days or more and is in India for 60 days or more in that year.

A person will be considered as NRI if he/she does not fulfil the above-mentioned conditions.

What do you mean by an OPC?

  • One person company (OPC) means a company formed with only one (single) person as a member, unlike the traditional manner of having at least two members.
  • Section 2(62) of Companies Act defines a one-person company as a company that has only one person as to its member.
  • Furthermore, members of a company are nothing but subscribers to its memorandum of association, or its shareholders.
  • So, an OPC is effectively a company that has only one shareholder as its member.

What was the Situation prior to Budget 2021?

  • Rule 3(7) of the Companies (Incorporation) Rules, 2014 provided that from the date of incorporation, One Person Company (OPC) cannot convert itself into other companies like in private or public company unless a period of 2 years have elapsed.
  • One relaxation from the same was given in Rule 6(1) of the Companies (Incorporation) Rules, 2014 which provided for mandatory conversion of OPC into a Public Company or a Private Company as where the paid-up share capital of a One Person Company exceeded fifty lakh rupees or its average annual turnover during the relevant period exceeded two crore rupees, it shall cease to be entitled to continue as a One Person Company.
  • To become an eligible member of an OPC, only an Indian citizen, and resident in India was eligible to become a member and nominee of an OPC.
  • When NRIs return to India, they faced issues related to their accrued incomes in their foreign retirement accounts, which mainly occurred due to mismatch in taxation periods.
  • They also faced difficulties in getting credit for Indian taxes in foreign jurisdictions, leading to double taxation.

What was brought into by Budget 2021 regarding OPC’s and NRI’s?

  • Budget 2021 proposed removing restrictions with respect to paid-up capital and turnover for setting up OPCs, by allowing OPC companies to grow without any restriction on paid-up capital and turnover, allowing their conversion into any other private company any time. 
  • The government also notified a major economic concession to its citizens living abroad, by proposing the reduction of the residency limit for an Indian citizen to set up an OPC from 182 days to 128 days and allowing also NRIs to incorporate OPCs in India.
  • NRIs may be able to incorporate One Person Company and no turnover/capital threshold will be applicable.
  • This would incentivize investments from NRIs in start-ups in India.

The concession is expected to benefit a large number of Indians living in the Gulf, which has the highest number of non-resident Indians (NRIs). These Gulf expats will now be able to better plan their future for a day when their overseas work or contracts end and they have to leave their countries of limited residence to return back to India.

Incentivisation to one person company by removing capital limits, free conversions and overhauling residency limits definitely to boost the start-up ecosystem in India. Simplified regime for one person company will encourage start-ups and entrepreneurs to do business under a corporate structure in an organised and structured manner that can help them to scale and grow.

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