This article is written by Garima Sisodia, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.com.
The outbreak of COVID-19 in the year 2020, resulted in the health crisis, economic downfall, and involuntary stay of individuals in foreign countries. Actions such as lockdown, suspension of international flights, quarantine, and lockdowns initiated by the government of most of the countries to tackle the pandemic(“COVID-19”) efficiently. Meanwhile, individuals who have come to visit India have to involuntarily extend their stay in India due to either quarantine or cancellation of international flights. Generally, individuals are taxable in India if their stay exceeds a certain number of days in the year. This has resulted in creating disappointment among the individuals as their involuntary stay has brought them within the tax bracket. To address this issue, the Central Board of Direct Tax (CBDT) issued circulars dated 8th May 2020 (370142/18/2020-TPL) and 3rd March 2021 (370142/18/2020-TPL). The said circulars are elaborated in the latter part of the article and how individuals facing double taxation can be benefitted from the same.
Residential status of an individual
According to Section 6 of the Income Tax Act,1961, read with Finance Act 2020:
An individual who is not a citizen of India or a person of Indian origin may become resident in India only in one of the following situations:
- If he stays in India for 182 days or more, or
- If he stays during the Previous year (PY) for 60 days or more and also stays for 365 days or more in the preceding four years.
Thus, in a common situation, if the period of stay of a person other than the citizen of India or a person of Indian origin is 182 days or more, the residential status of such person would be equivalent to that of an Indian resident. A citizen of India or a person of Indian origin may become resident in India only in one of the following situations –
- If his total income from Indian sources other than the income from foreign sources does not exceed fifteen lakh rupees in PY and he stays in India for 182 days or more during the PY; or
- If his total income from Indian sources other than the income from foreign sources exceeds fifteen lakh rupees in PY and:
- He stays during PY for 182 days or more; o
- He stays during the PY for 120 days or more and also stays for 365 days or more in the preceding four previous years.
Further, According to Section 5 of the Income Tax Act, 1961, the scope of total income; the total income of the resident includes all income whether arising in India or outside India.
The issue pertaining to residential status
Since the emergence of COVID 19 has resulted in an unnecessary stay of the individual whether on account of quarantine or suspension of the international flights has led to the number of stays for 182 days or more than that. Accordingly, as per Section 6 of the I.T. Act, 1961; once the condition of stay for 182 days or more exceeds that, such an individual is considered as a “Resident” of India. The total income of the “Resident” includes all income generated in India or outside India.
The major concern for the taxpayers was the implication of double taxation due to stranding in India. It is a genuine hardship on the part of the taxpayers who have to bear the outcome of the “Residential” status in India on account of the pandemic. Besides this, once the status of “Resident” is attracted, there is a huge change in tax rates as compared to the status of “NR.”
E.g., Interest earned on the NRE account and FCNR account is tax-free. However, in the case of a resident interest rate on an NRE account, it becomes taxable. In the case of a non-resident, only the income arising in India is taxable whereas, in the case of a resident, the global income is taxable. The rate of capital gain tax on unlisted shares increases to 20% (with indexation) in the case of the long term compared to the rate of 10% (without taxation).
As a result of the same various representations being made by the taxpayers stating that they came to India for a particular duration and intended to leave India on a decided date so that they are not being covered under the gambit of “Resident status” in India. However, due to the sudden outbreak of COVID-19 followed by lockdown and cancellation of international flights, they are required to prolong their stay in India.
The relief provided by the Central Board of Direct Tax (CBDT)
For the previous year 2019-20(AY 2020-21)
The CBDT vide circular 11/2020 dated 8th May 2020 has declared that to determine the residential status under Section 6 of the Act in respect of an individual who has come to India on a visit before 22nd March 2020; the period from 22nd March 2020 to 31st March 2020 shall be excluded. Further, clarification on the same has been issued on 9th May 2020 stating that for the financial year 2020-21, a similar circular will be issued excluding the number of days till the time there is the removal of restriction on the international flights.
For the previous year 2020-21 (AY 2021-22)
The CBDT vide its circular 2 of 2021 dated 3rd March 2021; further released clarification regarding the residential status of individuals who got stranded in India due to pandemics.
- The conditions mentioned under Section 6 of the I.T. Act,1961 read with relief provided by the CBDT via circulars, are required to be attracted to obtain the “Resident” status. Thus, the merely prolonged stay will not result in itself in creating the resident status.
- Generally, countries have a condition of 182 days or more for declaring the status of residents. In view of this, it is likely possible that an individual will be a resident of more than one country at the same time.
- As per the “tiebreaker rule” in the DTAA, the person will become a resident of only one country. DTAA adequately addresses the issue pertaining to the residency of an individual depending upon various attributes. Accordingly, an individual would be termed as a resident of such country where his permanent home is located or place where his personal and economic relations are vital
- To ensure that individuals do not bear the burden of tax on the same income in a different jurisdiction, the credit is given in the home country for the tax paid in a foreign country.
- On account of various disputes arising because of COVID-19, the proper guidelines were also recommended by the OECD. According to it the Articles contained in the DTAA duly addressed the concept of “dual residency.”
- In most cases, according to DTAA, the country being the “source jurisdiction” has taxation rights of employee’s income only if the employees are present in that country for more than the prescribed number of days or the employer is a resident of the source jurisdiction or the employer has a permanent establishment in the source jurisdiction that bears the remuneration.
Though there exists no possibility of double taxation as per the provision of the Income Tax Act, 1961 read with the DTAAs. However, to understand the situation where the taxpayer is facing double taxation due to the forced stay in India, the Board has decided to obtain certain information from such Individuals. After obtaining such information, the Board shall examine the requirement of general relaxation or specific relaxation depending on the circumstances of each case.
Therefore, for all those individuals facing the double taxation problem even after taking into consideration the relief provided by the respective DTAAs, he may furnish the information in Form- NR annexed to this circular by 31st March 2021. Further, this form shall be electronically submitted to the principal Chief Commissioner of Income-tax (International taxation).
The details asked in the Form NR are descriptive in nature where the taxpayer has to substantiate the demand of relief for double taxation by giving each information as asked in the given form. Adequate reasons to be given for levying double taxation despite existing DTAA provisions.
Undoubtedly, the COVID-19 has created an exceptional situation across the countries. However, there is a need to answer the queries raised by the taxpayers who ultimately bear the tax burden. India along with many other countries such as the USA, UK, Germany, Australia, has brought various measures to mitigate the hardship of the genuine taxpayers. E.g: The USA and UK have provided relaxation of 60 days subject to the satisfaction of certain conditions.
The guidelines issued by the OECD though recommendary in nature, have addressed this issue in a more simplified manner. It has stated that the situation of COVID-19 should be considered as an exceptional and temporary change of the location where employees exercise their employment such as working from home, should not create a new permanent establishment for the taxpayers. However, there is a lack of clarity for the individuals who belong to such a country with which there exist no Double Taxation Agreements. In the same line, there is an absence of clarity for the employees of foreign nationals who got stranded in India and are doing work from India.
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