Introduction
When people are calculating the income tax, they tend to consider things such as incomes such as salaries, business profits, rent or investments. However, the Income-tax Act of 1961 does not begin at your payday. It begs the question whether India is entitled by law to impose taxes on you. It only depends on your residential status.
We spend the majority of our lives in one country, do our jobs in another, and receive the money in another one- a classical students global networking situation. Thus two men with the same income, but with vastly different taxation outcomes: one is paying in India the whole of his income, the other only on that which is related to India. The statutory residency of Section 6 is the one you have, rather than your citizenship or passport, or even the currency you are paid with.
With that residency test, then, as a prelude to all others: it is the foundation to look at foreign property, global income, and relief on a double taxation. In the real world the tax depends on what you earn as well as the legality of your business relationship with India.
The Constitutional and Jurisdictional basis
Ultimately, taxation is more or less a game of power. Before the state can be able to slap a tax on the fact that money appears, it must first of all be connected with the taxpayer or the transaction. Such a connection is known in the legal community as a tax nexus, and it can occur in two forms: the cash may be earned within the country, or the earner of the cash may live in the country. They are commonly referred to as source-based and residence-based taxes.
The Indian constitution under the Entry of the Union List, 82, also permits the taxation of all incomes other than agricultural by the Parliament. However, the constitution gives lawmakers the right to determine the extent to which they would tax without specifying the limit. Part 5 and 6 of the Income-tax Act 1961 attach tax liability to residence, and so there is the way they calculate that either India is entitled to assert jurisdiction over your global income or that it is the income earned within its borders.
In a nutshell, residence will serve as an economic loyalty test. In case of your living in the country and belonging to its legal and economic system, you can be taxed by the state on your international income. Otherwise, India is entitled to revenue only that which is generated within its boundaries. This general rule is what moves cross-border tax treaties, through the cross-border tax rules of territorial nexus or foreign income taxes.
Determination of Residential Status: Section 6
Section 6 of the tax code applies a test that is day-count based which only examines the period of time that an individual physically remains in India in the fiscal year, citizenship, residency, or even intention are not looked into. The point is to maintain the rule equally and provide people with some assurance of their position.
In order to be considered as a resident, you must spend over 182 days in India in the year. Alternatively, in case you have stayed 60 days or above in the present year and 365 days or above in the past four years, you can also be regarded as a resident. But to ensure that people do not avoid residency artificially, there is a relaxation of the rule in case of the Indian nationals and those of Indian origin. Where one then replaces the 60 days rule with 182 days and in high income situations it may replace with 120 days.
Unless you satisfy either of the two thresholds you are deemed to be a non- resident during that year. Since it only depends on you being there, your position may vary each year. according to the Act, this classification is the first and most significant in the establishment of your tax liability.
Classification of Residents and Non-Residents: ROR, RNOR and NR
This means that the law is not considering all the inhabitants as equals even in cases where an individual has fulfilled the requirements of Section 6 of being considered as a basic resident. The ones who do not pass the residence test remain categorized as the Non-Residents (NR), the Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR) are further differentiated. This secondary classification is necessary because it determines the extent to which foreign income can be taxed in India, which is why it seems like an additional bureaucratic process that students in India must undergo.
It is only when a person has a consistent and continuous link with India that he or she is one of the residents and a regular resident. The Act takes into consideration the previous residence of a person in the country towards this end; one must have lived in India at least 2 of the last ten years and must have spent 730 days in India during the seven years before. Once these additional conditions have been fulfilled, the person will be treated as fully integrated into the Indian tax regime and India will tax its worldwide income despite the country of origin or destination of income or receiving the student will receive money in another country with several states.
An individual is classified as resident but not ordinarily resident when he or she does not satisfy a set of additional continuity requirements, notwithstanding satisfying the basic residence requirements. This category typically incorporates those individuals who have recently arrived back to India after having lived in other countries or those who visit the country once in a while. The RNOR status is a transitional phase, whereby the revenue generated in India is taxed, but most of the foreign revenue is not, unless it is of an Indian controlled company. Consequently, the law takes into consideration that fiscal attachment occurs over time and it should not lead to an immediate global tax burden – in a similar way we are permitted to carry with us some of our semester grades abroad.
A non-resident, in its turn, is a person who fails to satisfy the day-count requirements of Section 6 of the relevant fiscal year. India only has the territorial powers to tax such individuals. The foreign profits are not taxed in India and only the income earned, received or assumed to have been earned in India is taxed. The difference in terms of ROR that implies complete fiscal loyalty, RNOR that implies partial loyalty, and NR that implies merely territory taxation portrays the tiered nature of the Act, which I attempt to put in mind whenever budgeting my study-abroad trip.
Taxability of Income under Section 5
So, as such, Section 5 presents the distribution of total income depending on residential status. Essentially, all the income that is earned, received, or simply sneaking in is taxable in India on residents and ordinarily residents, that is, your global cash will be monitored. Income in India, and income originating in India, and foreign income earned in running a business in India are all taxed on a Resident but Not Ordinarily Resident, whereas foreign money is not taxed. Foreign income? Not taxable in India. A non-resident is only hit on the stuff he or is supposed to earn or deliver in India or in India.
What is “Income Accruing in India”? (Section 9)
Section 9 is entirely on the point that some income is considered to accrue or arise in India, thus expanding the tax net. According to the law, when income is bound to Indian territory it must be taxed, despite the fact that the non-resident never in person receives the money. So prepare—offshore receipts or clever contracts will do you no good.
In the situation when something is associated with Indian economic activity, it is said to be accrued there. That includes a business relationship, or capital gains received on the sale of assets in India or payment of a salary to services done in India, although the payment is made elsewhere. The same provision applies to IP royalty in India, government or resident interest, and tech service fees in India – they are all Indian income despite the remittance to foreign countries.
The key idea of Section 9 is to secure the taxing rights of sources. It traps taxability on where the action is taking place, rather than the geographic locality of the money landing, by ensuring that you cannot avoid tax by making sure that the real action is performed inside the country, but not where the money is actually landing.
Landmark Judicial Interpretations
In the CIT v. R.D. Aggarwal and Co case in the Supreme Court, the issue that was hot was that of business connection. The Court said, you do not in any way have a business relationship with a foreign firm simply because that firm has made some money based on India. It must exist physically and continuously with close connection between the income generated in a foreign country and what is going on in India. The decision indicated that in order to tax non-residents, there had to exist a valid commercial connection on Indian soil – not a remote or incidental connection.
Ishikawajima-Harima Heavy industries vs. DIT was the off-shoring supply contracts in mega projects. The Court ruled that the fact that a project is based in India does not imply that profits generated on equipment sold and exported to other countries are subject to taxation. When the income generating activity happens in India, then only tax is applicable. This limitation assisted in restraining source-based taxation and promoted the notion of territorial nexus.
Overall, these cases demonstrate that a territorial relationship determines whether the cross-border income is subject to the Indian tax law, whereas your residence is what determines how much of a tax penalty you receive.
Conclusion
Under the Income-Tax Act of 1961, the MVP, where in determining the amount of tax one has to pay, is residential status. Before you can even begin doing the calculations on the taxable income, the law questions whether you are in fact under the jurisdiction of India. Having been non-residents prior to and including 1978 you only pay tax on the Indian-related income; a resident or ordinarily resident you pay tax on the entire global income; and a RNOR, it is the limited global tax affair. These legal regulations and the courts ensure that taxes are not levied by real economic connections, but by the place you pay your bill.
As your residence status is the one that determines the overall range and the amount of your tax bill as well as whether it is legitimate or not, it is of paramount importance to have this ironed out, particularly when people are travelling all over the world and operating laptops in any location.
References
1. Income Tax Act 1961.
2. Finance Act 2020.
3. OECD, Model Tax Convention on Income and on Capital (OECD Publishing, latest edn).
4. Double Taxation Avoidance Agreements entered into by India (relevant provisions on residence and tie-breaker rules).
5. CIT v R D Aggarwal & Co [1965] 56 ITR 20 (SC).
6. Ishikawajima-Harima Heavy Industries Ltd v DIT [2007] 288 ITR 408 (SC).
7. GVK Industries Ltd v ITO [2015] 371 ITR 453 (SC).
8. CIT v A Abdul Rahim (1996) Mad HC.
9. CIT v Suresh Nanda (2015) Del HC.
10. Surjeet Singh v CIT (1983) SC.
11. Narottam & Parekh Ltd v CIT (Bombay HC).
12. Kanga, Palkhivala and Vyas, The Law and Practice of Income Tax (10th edn, LexisNexis).
13. Institute of Chartered Accountants of India, Study Material on Direct Taxation (latest edn).
14. Central Board of Direct Taxes, Circulars relating to residential status and income deemed to accrue in India.
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Author: Roopampreet Kaur, B.A; LL.B (Hons.) Student, Lovely Professional University, Punjab
