Determination of Residential Status of Individual – Amendments

Amendments in the provisions related to the determination of Residential Status of an Individual – attempted something, achieved nothing

Executive Summary: The Finance Act, 2020 made various other key amendments which were originally not proposed in the Finance Bill, 2020. In this article, the Author has attempt to discuss each amendment in-depth in comparative form (i.e. the position as per earlier law viz-a-viz position as per amended law). Further, the Author has also provided the Flow Chart which will be proven as a useful tool to determine the residential status of an Individual as per amended provisions.

1. Amendment in Explanation – 1(b) to the section 6(1) of the Income-tax Act, 1961 (“IT Act”)

1.1 Before going further, the author hereunder reproduced the relevant provisions in comparative form (i.e. before the amendments and after the amendments);

Before the amendments

After the amendments

Residence in India. 6. For the purposes of this Act,— (1) An individual is said to be resident in India in any previous year, if he— (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or (b) [***] (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. Explanation. 1—In the case of an individual,— (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been  ; (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted

Residence in India. 6. For the purposes of this Act,— (1) An individual is said to be resident in India in any previous year, if he— (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or (b) [***] (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. Explanation. 1—In the case of an individual,— (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been  ; (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year,” for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted.

1.2 As seen from the above, before the amendments, the person being  a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C who, being outside India, comes on a visit to India in any previous year shall be treated as Resident in India, if he having;

• is in India in that year for a period or periods amounting in all to 182 days or more (OR)
• within the 4 years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India (and) for a period or periods amounting in all to 182 days or more in that year

1.3 Accordingly, the second condition i.e. 182 days in previous year (and) 365 days in 4 preceding previous years was redundant and only first condition i.e. is in India in that year for a period or periods amounting in all to 182 days or more was relevant.

1.4 However, the Act reduced the period of 182 days in previous year to 120 days in case of the citizen or person of Indian origin having total income, other than the “income from foreign sources” (the term has been defined and is discussed in later part of this article) exceeding Rs. 15 lakhs during the previous year.

1.5 Accordingly, the person shall be treated as Resident in India, if he;

i. being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C who, being outside India, comes on a visit to India in any previous year

• • is in India in that year for a period or periods amounting in all to 182 days or more (OR)
  • within the 4 years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India (and) for a period or periods amounting in all to 182 days or more in that year

ii. being the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding Rs. 15 lakhs during the previous year

• • is in India in that year for a period or periods amounting in all to 182 days or more (OR)
  • within the 4 years preceding that year been in India for a period or periods amounting in all to 365 days or more, is in India (and) for a period or periods amounting in all to 120 days or more in that year

1.6 Further, the section 6(6) of the IT Act provides that a person is said to be “not ordinarily resident” in India in any previous year if such person is an individual who;

• has been a non-resident in India in 9 out of the 10 previous years preceding that year, or
• has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less

1.7 Furthermore, the provisions of the section 6(6) has also been amended and provides that A person is said to be “not ordinarily resident” in India in any previous year if such person is a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding Rs. 15 Lakhs during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to 120 days or more but less than 182 days.

1.8 Accordingly, the person falling the para 1.5(i) to above is required to pass a test as provided in the section 6(6) of the Act to become “not ordinarily resident”. However, a person falling in para 1.5(ii) to above is “not ordinarily resident” itself.

1.9 Therefore, in view of the above, if the person being the citizen or person of Indian origin having total income, other than the income from foreign sources, is equal to Rs. 15 lakhs or less during the previous year then he / she shall be governed by the provisions as discussed in the para 1.5(i) above.

2. Insertion of new Subsection (1A) in the section 6 of the IT Act

2.1 Before the amendments, the residential status of an individual was decided in accordance with provisions of the section 6 of the Act, which was solely based on numbers of days stayed in India. As this was mechanical provision therefore it may create opportunities as well as difficulties for an Individuals. Further, in order to cover the stateless person, the Finance Act has introduced new Subsection (1A) in the section 6 of the Act, which provides that;

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature;

2.2 Accordingly, this provision applies to;

• an individual, being a citizen of India
• having total income, other than the income from foreign sources, exceeding Rs. 15 Lakhs during the previous year, and
• he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature

2.3 For the purpose of fiscal laws, most countries determine the residential status of the individual based on numbers of days stays in that country. However, US follows different system and taxed its citizens based on citizenship irrespective of fact that whether such individual is resident of other country or not.

2.4 Sometimes, individual arrange their affairs in a such way that he would not become resident of any country and escape the taxation of his worldwide income in any country based on his / her residential status. Take it reverse, sometimes individual may travel frequently due to his / her business / profession or for the purpose of official duties, then in such case he / she would become stateless person (i.e. not a resident of any country). In such case, they cannot avail the benefits of DTAAs as the benefit is available to only a resident person.

2.5 In order to cover these individuals, the Act has been amended and provides,

• an individual, being a citizen of India
• having total income, other than the income from foreign sources, exceeding Rs. 15 Lakhs during the previous year, and
• he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature

shall be deemed to be resident in India.

2.6 The above conditions are cumulative one and if the individual not satisfy any of condition then he / she would not be governed the provisions of this subsection. Further, this section is overriding the section 6(1). Therefore, upon satisfaction of the all the above conditions, the individual will be governed by the provisions of this subsection only. Further, if the person is governed by the provisions of this subsection then number of days stayed in India are irrelevant.

2.7 As per newly inserted provisions of the section 6(6)(c), the individual deemed as resident under section 6(1A) would be considered as “not ordinarily resident”.

2.8 Interestingly, having overriding effect of the section 6(1A) over the section 6(1) of the Act, one thing also emerges that person who is resident in India by virtue of the provisions of the section 6(1) and having total income exceeding Rs. 15 lakhs during the previous year shall be deemed to be resident in India in that previous year and consequently would be governed by the provisions of the section 6(1A) and considered as “not ordinarily resident” in view of the provisions of section 6(6)(c). With due respect, it creates a situation like;

“दुल्हन को लेने गए और बाराती भाग गए”

3. Explanation of term “income from foreign sources”

3.1 The term “income from foreign sources” is defined in explanation to the section 6 of the Act which provides that the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

3.2 Similar language is also found in the proviso to section 5(1) of the Act which provides that “in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.”

4. Apart from the amendment, lets now discuss the consequences upon considering an individual as “not ordinarily resident”. Section 5 of the Act is heart of entire income tax which decide the scope of total income. The provisions of section 5 are reproduced as under;

Scope of total income. 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

5. Cut in short, the above provisions are summarized as under;

Remark	Resident	Non Resident	Not Ordinary Resident
Common Provision	includes all income from whatever source derived which— (a) is received or is deemed to be received in India; or (b) accrues or arises or is deemed to accrue or arise to him in India; or	includes all income from whatever source derived which— (a) is received or is deemed to be received in India; or (b) accrues or arises or is deemed to accrue or arise to him in India.	includes all income from whatever source derived which— (a) is received or is deemed to be received in India; or (b) accrues or arises or is deemed to accrue or arise to him in India; or
Variation	(c) accrues or arises to him outside India:	–	(c) the income derived   from a business controlled in or a profession set up in India
Summary	Worldwide income taxable in India	Only Indian source income taxable in India	Indian source income and worldwide income derived from a business controlled in or a profession set up in India.

Flow Chart: User can download flow chart by clicking following link.

https://taxguru.in/wp-content/uploads/2020/04/Flow-Chart.pdf

Conclusion: The attempt of the Government is in line with worlds best practice, however, practically speaking, the purpose is not yet achieved rather the language of the newly inserted provision of section 6(1A) has created a chaos.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor publisher or its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

About Author: The author, Manish Harchandani (founder of Harchandani & Associates) is practicing Chartered Accountant and mainly practice in Direct Tax, International Taxation, Transfer Pricing & FEMA related advisory, litigation & compliance matters. He can be reached at harchandanimanish@gmail.com