This article is written by Yasar Arafath, pursuing a Diploma in Business Laws for In House Counsels from Lawsikho.com. 

Introduction

Due to pandemic and with Indians under strict lockdown from March 2020, the Government of India has imposed travel restrictions and therefore allowed only few repatriation flights, to bring Indian citizens who were struck in other nations due to pandemic back to India and return foreigners who were struck in India to their home countries. Involuntarily non-residents and foreigners have had to extend their stay in India as a result of COVID-19 lockdown which has resulted in higher tax liability for them.

There was a confusion among non-resident Indians (NRI’s) with regard to their tax liability in India. Such individuals have effectively been stuck in India, involuntarily increasing their time in the country. Their prolonged stay has exposed their offshore business and professional income to be taxed in India, as it may be regarded as controlled from India and the Individual may be regarded as ‘resident but not ordinary resident in India’. Depending on the facts, if any individual qualifies as an ordinary resident (OR) in India, their global income could be taxed in India.

Income Tax Residency Rules

As per the section 6(1) of the Income Tax Act, 1961, an individual who is Indian Citizen or a person of Indian origin qualifies as resident in India during a financial year on satisfaction either of below conditions:

Condition 1: 182 days of stay in India or more during the financial year; or

Condition 2: 365 days of stay in India or more during preceding four financial year.

Through Finance Act 2020, fundamental changes were made in the residential status of individual who is Indian Citizen or a person of Indian origin from Financial Year 2020-21 onwards:

In Condition 1: the above mentioned period was reduced to 120 days from 180 days for Indian citizen or to a person where the income accruing in India of such individuals during the particular financial year is more than Fifteen Lakhs rupees (Rs. 15,00,000 /-) and the condition remains same for such individuals whose taxable income in India is less than Fifteen Lakhs rupees (Rs. 15,00,000/-).

If an Individual is carrying significant commercial undertakings form India will be affected with this amendment but if they manage their stay in such a manner to attain the status of NRI in India by limiting their stay in upto or less than 181 days.

In Condition 2: there is no change made. 

As per the section 6 (6) of the Income Tax Act, 1961, an individual who is Indian Citizen or a person of Indian origin qualifies as not ordinary resident in India during a financial year on satisfaction either of below conditions:

Condition 1: For nine out of the ten previous years preceding that year if an individual who has been a non-resident in India; or

Condition 2: has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to or less than 729 days (seven hundred and twenty-nine days or less).

Organisation for Economic Cooperation and Development (OECD) guidance

Organisation for Economic Cooperation and Development (OECD) in April 2020 published guidelines on the tax residency matter and advised that:

• Tax Residency issues should nor arise due to temporary dislocations during COVID-19; and
• If there exists any tax treaty between the jurisdictions where an individual has potential residency will try to resolve conflict through the ‘tie-breaker’ residency (i.e… Permanent home, habitual place, center of vital interests and nationality).

Due to the current COVID- 19 crisis which constitutes an exceptional circumstance, the tax authorities of different nations must consider the normal period while assessing the person’s residential status. The guidelines issued by the Organisation for Economic Cooperation and Development have no binding effect on national laws.

India’s response to the issue

Central Board of Direct Taxes (CBDT) on May 8th, 2020 via Circular 11 has issued clarifications to address the issue under section 6 of the Indian Income Tax Act, 1961. Various representations were made to CBDT addressing issues faced by the NRIs who were affected taxpayers.

Income Tax Act, 1961 of India has laid down rules to determine the residential status of Non Resident Indian (NRI). Income Tax Act does not differentiate between voluntary and involuntary stay for determination of residency, to address this issue a clarification was issued which provided certain relaxations in determining tax residency status of NRI. 

Computation of residential status of individual for FY 2019-20 who has come to visit India before 22nd March 2020:

The said circular has acknowledged the legitimate concerns of the foreign individuals and NRIs on their tax residential status in India. However the said circular provides relief till 31st March 2020 and has addressed the relief to be provided for the FY 2020-21, where the situation remains the same if the lockdown continues during the FY 2020-21 and there is no clarity on when international flights will resume as the situation of pandemic still exists.

This was brought to the notice of Government of India where it made a press release to address the issue and assured that a circular will be issued once the international flight operations resume to exclude the period of stay to these individuals till the date of normalisation for determining the residential status of the individuals for FY 2020-21.

Tax residency status of individual in India

If the individual qualifies to be a resident and the secondary test as per the Income tax Act is to made to determine whether the individual qualifies as a not ordinary resident (NOR) or ordinary resident (OR) test for the purpose of taxability of global income in India and declaration of foreign assets in Income Tax returns. If an individual qualifies to be an Ordinary Resident as per the Indian Income Tax Act his global income and asset will be taxed in India subject to relevant Sections of Income Tax Act.

Conclusion

It was a welcome move from the Government of India addressing the Tax residency issue of individuals who are struck in India due to pandemic and non-operation of international flights but reducing the stay of individuals to 120 days in a year from FY 2020-21 onwards without any relief of lockdown days for said FY, is unquestionably creating qualms in the minds of NRI, including those individuals who are directors of foreign companies. This has resulted in exposure of effective management or permanent establishment in India of such foreign companies. This has landed not only the individuals but the foreign company finding in such situation where they have to carefully evaluate the residential status of such individual’s and subsequently their company status in India.

References

1. https://www.bloombergquint.com/law-and-policy/covid-19-may-increase-tax-liability-for-non-residents-experts-say
2. https://www.internationallawoffice.com/Newsletters/Private-Client-Offshore-Services/India/Cyril-Amarchand-Mangaldas/CBDT-clarifies-tax-residency-for-people-unable-to-leave-India-due-to-COVID-19
3. https://home.kpmg/xx/en/home/insights/2020/05/flash-alert-2020-242.html
4. https://www.indialawoffices.com/legal-articles/tax-residency-status-of-nri-new-rules-under-income-tax

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