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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.

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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:

Case

Period of Stay NOT to be considered for determining residential status in India during 2019-20

Case 1

The individual is unable to leave India on or before 31st March 2020

Period of stay in India from 22nd March 2020 to 31st Match 2020

Case 2

Quarantined in India due to pandemic on or after 01st March 2020 and

Period of stay 

  1. from beginning of quarantine date till date of departure or 
  2. 31st March 2020 as the case may be

Departed through evacuation flight on or before 31st March 2020 or

Unable to leave India on or before 31st Match 2020

Case 3

The individuals has departed evacuation flight on or before 31st March 2020

Period of stay in India from 22nd March 2020 till date of departure

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

Individual will be considered as tax resident in India based on satisfaction of below criteria:

S.No

Particulars

FY 2019-20

FY 2020-21

Remarks

 

For Indian citizen or person of Indian origin

 

Stay in India during relevant FY and their Income accrue from India during said FY is upto 15 lacs

182 days or more in FY 2019-20

Or

365 days or more during FY 2015-16 to FY 2018-19

182 days or more in FY 2019-20

Or

365 days or more during FY 2016-17 to FY 2019-20

For computing period of stay in India for FY 2019-20, below period will be excluded:

  • 22nd March 2020 to 31st March 2020 (if individual is in India during said period)

  • Quarantine date till date of departure or 31st March 2020 (if individual is quarantined in India on or after 1st Match 2020 and left India on or before 31st March 2020 or unable to leave by said date)

  • 22nd March 2020 till date of departure (if individual departed evacuation flight on or before 31st March 2020)
 

Stay in India during relevant FY and their Income accrue from India during said FY is more than 15 lacs

182 days or more in FY 2019-20

Or

365 days or more during FY 2015-16 to FY 2018-19

120 days or more in FY 2019-20

Or

365 days or more during FY 2016-17 to FY 2019-20

 

For Foreign National

 

Stay in India of Individual other than above (i.e. Foreign national)

182 days or more in FY 2019-20

Or

60 days or more in FY 2019-20 and 365 days or more during FY 2015-16 to FY 2018-19

182 days or more in FY 2020-21

Or

182 days or more in FY 2020-21 and 365 days or more during FY 2016-17 to FY 2019-20

For computing period of stay for FY 2020-21, once the international flight operations resume Government of India will issue a circular to address the tax residency issue and excluding the period of stay of those individuals who were struck in India due to pandemic in the FY 2020-21.

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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