The whole Covid-19 pandemic situation has made government to release a lot of relaxations and clarifications. One major concern that was brought forward for the clarification was the question of double taxation. Due to the pandemic, lot of flights were suspended making the temporary stay of the non-residents in India to extend for the further period.
Section 6 of the Income Tax Act, 1961 provides provisions relating to the determination of residential status of the person. The below table explains the provision to qualify as the resident of India in a lucid manner:
|Particulars||Conditions for becoming Resident in India|
|Non-citizen of India||1) stay in India for 182 or more days in FY 2020-21
2) stay for 60 days or more in FY 2020-21 AND total 365 days or more in preceding four previous years
|Citizen of India
Person of Indian origin
|Income from Indian sources exceeds INR 15 lakhs||1) stay in India for 182 or more days in FY 2020-21
2) stay for 120 days or more in FY 2020-21 AND total 365 days or more in preceding four previous years
|Income from Indian sources doesn’t exceed INR 15 lakhs||1) stay in India for 182 or more days in FY 2020-21
No second condition of preceding year’s stay
The resultant overstays of the person in the financial year 2019-2020 made government to provide relaxation for the year 2019-2020 in the matter of determination of the residential status through circular No.11/2020 dated 8th May 2020. The circular provided the following relaxations:
However, the said benefit was not extended to the Financial Year 2020-2021. Since the pandemic is not controlled yet and a lot of people are still avoiding travel through flights due to which a lot of representations were received by government to extend the benefit.
In the light of the above, CBDT has issued Circular No.2/2021 dated 3rd March 2021 to provide clarification for the above. Here is a brief of the clarifications provided by CBDT.
1. “Short stay” – NO Indian residency:
It has been specified that there will be less chance of a Non-resident to stay in India for longer period of time in the FY 2020-21 even after considering the suspension of flights for some time. Since the number of days of stay will be less, thus the person cannot be termed as Resident.
The above clarification comes from the fact that flights to certain countries became operable when the Covid-19 started getting in control. The Non-residents had the availability of flights to go back to their country, however some of them still opted to stay.
The benefit should be provided only to the extent of the sufferings caused by mandatory lockdown and not if it was personally opted by the Non-resident.
2. “General Relaxation” – MAY lead to dual non-residency:
Most of the countries go by the same rule of 182 days or more for determination of residency. Under normal circumstances the person will remain resident of only one country however the situation might change in case general relaxations are provided. The situation of double non-residency might arise in case of general relaxation. The above can be explained with the help of the given situation.
Situation: Mr. X came for a temporary stay in India, however due to Covid pandemic, he had to overstay for more than 182 days. Considering the pandemic situation, the country decided to not consider the time period when country was hit by Pandemic till the flights became functional. Due to the above scenario, the person was considered to be non-resident of India. Further the person was also considered as a non-resident in his original country because the person didn’t stay there for the minimum required time period as well.
The above situation leads to non-residency and non-double taxation which is not very ideal situation and hence should be avoided. Thus, the general relaxation should be avoided.
3. “Tie breaker rule” – Double Taxation Avoidance Agreement (DTAA):
There are certain cases where a person will be considered as resident even if the person stays in India for less than 182 days. They are:
(i) Citizen of India or person of Indian origin – if total income from Indian sources exceeds 15 Lacs in PY 2020-21, if his stay is for 120 days or more in PY 2020-21 and also stays for 365 days or more in preceding four previous years, and
(ii) Other than Citizen of India or person of Indian origin – if his stay is for 60 days or more in PY 2020-21 and also stays for 365 days or more in preceding four previous years.
Such situation may lead to double residency which might create the trouble of double taxation. In order to avoid the said situation, DTAA has provided with a tiebreaker in case a situation of dual residency will arise. The rule has a criterion on basis of which the person can determine residency in one country between the two countries. Further, DTAA provides a resolution mechanism through Mutual Agreement Procedure.
It is further to be noted that even if the person will be declared as resident but still, they will be “Not ordinary resident” and hence his foreign sourced income will not be taxable in India unless such income is derived from business controlled in or profession setup in India.
4. Employment income taxability
DTAA distributes taxation rights between employee’s jurisdiction of residence and where the employment is actually exercised. It has been very clearly specified that the income will be taxable in the resident country unless the employment is exercised in other country. The employee will be taxed in other country if the following situations are satisfied:
Situation: Mr X is an employee of US corporation but has come temporarily in India, unfortunately Mr. X got stranded in India due to Covid and had to provide Employment services from India only. In the said situation the income arising from employment will not be taxable in India unless Mr. X has stayed in India for more than 182 days or if salary is borne by Permanent establishment of the US corporation in India.
5. Credit for taxes paid in another Country
Rule 128 of the Income Tax Rules,1962 allows a resident person in India to claim credit of taxes paid in other country if the countries have signed DTAA.
CBDT has very clearly provided with facts that the situation of double taxation is very less likely to arrive even if no general relaxation in determining the residency status is provided for the Financial Year 2020-21. CBDT has referred provisions under the Act and DTAA dealing with residency criteria and also took into account OECD guidance and approach adopted by some of the countries.
However, even in the rarest situation, if the person still believes that they are being double taxed, then government has provided a solution for that too. Government has introduced a new Form-NR where the person can declare that he is being double taxed during the pandemic and declare the reasons and details for the same. This form is to be submitted electronically to the Principal Chief Commissioner of Income-tax (International Taxation).
Government will refer to such declaration and see that if relaxation is necessary to be provided or if it can be provided to a group of persons for a specific transaction as the case maybe.
However, CBDT doesn’t clarify on impact on “place of effective management” and creation of agency PE, Fixed placed PE or service PE. Circular is applicable only to individual assessee.
In a nutshell, Government has very smartly tried to explain the individuals that the situation of double taxation should not arise and hence ease up the troubles of the taxpayers. In fact, Government is more than willing to collect income tax from individuals who have intentionally stayed back in India during covid pandemic for their personal reasons. Now, the ball is in the court of affected non-residents for which CBDT is more than willing to hear the grief & issues faced by the non-residents.
About the Author: The Author, Deepanshu Gupta, is a Registered Valuer in asset class securities or Financial Assets and is a practicing Chartered Accountant, Managing Partner of DGA which is a multi-disciplinary audit and advisory firm providing gamut of services including audit, income tax, valuations, consulting and outsourcing services and can be contacted at [email protected]