CA Yazad D. Bajan

Introduction

The Hon’ble Finance Minister in her budget speech on 01st February, 2020 had proposed various amendments in the criteria for determining the residential status of an individual w.e.f. 01st April, 2020, by amending the provisions of section 6 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). The proposed amendments created a lot of practical difficulties and undue hardships to Non-Resident Indians. To mitigate the difficulties and undue hardship, changes were made to the proposed amendments before passing the same in the Parliament, on the basis of various representations and recommendations made by various stakeholders.

The Finance Bill, 2020 was passed by the Parliament with various relaxations on 23rd March, 2020 for Non – Residents. The said Finance Bill, 2020 had received the President’s assent on 27th March, 2020 and has become the Finance Act, 2020. There has been a considerable change in the provisions of residential status in the Finance Act, 2020 as compared to the Finance Bill, 2020.

Comparative analysis for determining the residential status of an individual

The author has made an attempt to discuss each amendment made under section 6 of the Act in a tabular format, so that it is easy for the readers to understand the difference between the provisions as per the erstwhile law, the provisions proposed by the Finance Bill, 2020 and the amended law as mentioned in Finance Act, 2020:

Sr. No. Erstwhile Provision i.e. Prior to Finance Act, 2020 Provisions as proposed by Finance Bill 2020 Amendments made by Parliament while passing Finance Act, 2020
1 Resident in India.

Section 6(1) of the Act has been reproduced hereunder:

“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 substituted ;

(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.”

The above section lays down the criteria for determining the Residential Status of an Individual. An individual is bifurcated into two categories:

1. Resident

2. Non-Resident

1. Resident – An Individual is treated as a Resident Indian, if he satisfies either of the following conditions:

(a) the individual is present in India for      182 days or more in a financial year;

OR

(b) the individual is present in India for 60 days or more during the financial year and 365 days or more in the preceding 4 previous years.

However, there has been an explanation with regards to the above, which is mentioned hereunder:

(a) An individual, being a citizen of India, who leaves India in any previous year as a member of the crew or who leaves India for the purpose of employment, the words 60 days will be replaced by 182 days.

(b)  An individual, being a citizen of India or Person of Indian Origin (section 115C of the Act states that the person shall be deemed to be of Indian Origin if he, or either of his parents or any of his grand-parents, was born in undivided India), who being outside India , comes on a visit to India, the words 60 days will be replaced by 182 days

If an individual satisfies the conditions as mentioned above, he would be treated as RESIDENT INDIAN.

Once an individual becomes Resident in India, he will have to check whether he is an ‘Ordinary Resident’ or ‘Not an Ordinary Resident’. The same has been discussed in Sr. No.: 2 below.

2. Non – Resident  – Section 2(30) of the Act defines a Non-Resident as a person who is not a Resident as mentioned above, and for the purpose of sections 92, 93, 113 and 168 of the Act, includes a person who is not an ordinary resident .

The Finance Bill, 2020 proposed the following amendment to Explanation 1(b) of section 6 of the Act which is reproduced hereunder:

“the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting in that year be decreased to 120 days from existing 182 days.”

1. The proposed change states that an individual, being citizen of India or Person of Indian Origin, who being outside India, comes on a visit to India, stays in India for 120 days (instead of 182 days) or more and 365 days or more in a preceding 4 previous years will be resident in India for the purpose of the Act.

2. The Government was proposing to introduce the said provision, as there were instances which have come up to the notice of the government, where the stay of 182 days were misused by the Indian Citizen or Person of Indian Origin who comes for visit in India.

3. The individuals who were carrying out substantial economic activities in India were managing their stay in India, in such a manner that they remain Non-Resident Indians and do not have to disclose their global income in India.

4. To curb such practices, the Government had proposed to reduce the number of days of stay in India from 182 days to 120 days to determine the residential status for a citizen of India / Person of Indian Origin, who is outside India and comes for a visit in India.

5. It can also be observed that the Government has not proposed to make changes to Explanation 1(a) of section 6(1) of the Act as the said amendment is applicable ONLY for Explanation 1(b) of section 6(1) of the Act.

The Finance Act, 2020 has modified this proposed provision as mentioned in the Finance Bill 2020.

There has been an amendment to section 6(1) of the Act which is reproduced hereunder:

 

“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 substituted ;

(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 lakhs rupees during the previous year,” for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted.”

1. The amendment which has finally been made in section 6 of the Act is the one which is highlighted above. The said amendment is different from the one which was proposed in the Finance Bill, 2020.

2.  The said amendment states that an individual being an Indian Citizen / Person of Indian Origin, who comes to visit in India and the total income, other than ‘income from foreign sources’ (Income from foreign sources has been defined as income which accrues or arises outside India [except income derived from business controlled in or profession set up in India]) of such individual exceeds Rs. 15 lakhs during the previous year, the number of days of stay is reduced to 120 days from erstwhile 182 days.

3. Therefore, the said amendment won’t be applicable to those individuals whose total income, other than income from foreign sources is upto Rs. 15 lakhs. Such individuals would qualify to be Non-Resident if their stay in India is less than 182 days.

2 Not An Ordinary Resident.

Section 6(6) of the Act has been reproduced hereunder:-

“(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less;”

An individual is said to be ‘Not an Ordinary Resident’ in India if,

(a) an individual has been a Non-Resident in India for 9 out of 10 preceding financial years;

OR

(b) an individual has during the 7 preceding financial years been in India for an aggregate period of 729 days or less.

 

If any of the above conditions are satisfied, an individual would be treated as ‘Resident but Not an Ordinary Resident’ else he would be treated as ‘Resident and Ordinary Resident’. The taxability of income for the above two categories has been discussed in details under the category of SCOPE OF INCOME.

The Finance Bill, 2020 proposed the following amendment to sub – section (6) of section 6 of the Act which is reproduced hereunder:

“an individual or an HUF shall be said to be “not ordinary resident” in India in a previous year, if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6.”

1. As per the above proposal, the dual condition as mentioned in clause (a) and (b) of sub-section (6) of section 6 of the Act, was proposed to be replaced by only one condition i.e. the individual has been a non-resident in India in 7 out of 10 previous years.

2. This amendment was proposed in order to provide some relaxation in conditions for visiting Indian citizen / Person of Indian Origin as the number of days of stay in India was reduced from 182 days to 120 days to qualify as a Non-Resident.

The proposed provision in Finance Bill, 2020 has been withdrawn; therefore, the existing conditions to qualify for ‘Not Ordinarily Resident’ (NOR) is retained.

There has also been additions to the clause of section 6(6) of the Act which are reproduced hereunder:

“(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 of clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty – two days; or

(d) a citizen of India who is deemed to be resident in India under clause (1A).”

1. The new clause inserted under section 6(6) of the Act, the following individual would qualify to be ‘Not Ordinary Resident’:

a) an Indian Citizen / Person of Indian Origin with total income other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year and who has been in India for 120 days or more but less than 182 days; or

b) Indian Citizen who is deemed to be resident (as per section 6(1A) of the Act) and with total income other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year and are not liable to tax in any other jurisdiction by reason of his domicile or residence. The said clause is discussed in detail in Sr. No.: 3

3. Section 6(1A) of the Act:- Deemed Residency

Said clause was introduced by Finance Act, 2020 and there was no provision of deemed residency under the erstwhile act.

The Finance Bill, 2020 proposed the concept of deemed residency, which was introduced to bring in the tax net “Stateless Person”.

 The said proposal has been reproduced hereunder:

“an Indian Citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India”

1. The said proposed amendment states that the Indian Citizen would be deemed to be Resident in India in a case he is not liable to tax in any other country or territory.

2. The said proposed amendment was introduced with an aim to bring into the tax net, the high net-worth individuals, who may be Indian citizens, managing their stay in such a manner that they do not qualify to be a tax resident in any country and accordingly, they have to pay NIL tax or very minimal tax in India and rest of the world.

3. However, the above concept of deemed residency led to various concerns amongst the Indian Citizens who were employed overseas.

4. The Central Board of Direct Tax (CBDT) vide press release dated 02nd February 2020, stated that the new deeming provision was not intended to include in tax net those Indian Citizens who are bona fide workers outside India. It was further clarified that in case of an Indian Citizen who becomes ‘Deemed Resident of India’ will be treated as RESIDENT BUT NOT AN ORDINARY RESIDENT, and accordingly, income earned outside India by him shall not be taxable in India unless it is derived from Business or Profession controlled and set up in India.

5. The term ‘liable to tax’ is not defined under the Act. Certain judicial precedents state that the term ‘liable to tax’ does not equate to ‘actual payment of tax’. An individual will have to check the same under Double Taxation Avoidance Agreement (DTAA) entered with other countries by India. In absence of specific definition, it would lead to different interpretation and litigations.

The Finance Act, 2020 has modified the proposed provision in Finance Bill 2020. The clause (1A) of section 6 of the Act, as introduced by the Finance Act, 2020 has been reproduced hereunder:

“(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 lakhs 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”

1. The section covers those individuals who satisfy the following 3 conditions cumulatively:

(a) an individual, being a citizen of India

(b) having total income, other than income from foreign sources, exceeding Rs. 15 lakhs during the previous year; and

(c) 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. Once all the above conditions are satisfied, the person will be treated as Resident but Not An Ordinary Resident.

3. Further, sub – clause (1A) has an overriding effect to clause (1) of section 6 of the Act.

4. It would be interesting to note that since clause (1A) has an overriding effect to clause (1) of section 6 of the Act, the person who is a Resident Indian by virtue of clause (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 accordingly, clause (1A) would be applicable to that individual. Once an individual is governed by clause (1A), he would be treated as a “Resident but Not an Ordinary Resident” and the income will be taxed in the hands of an individual as mentioned in the SCOPE OF INCOME below.

5. The Government will have to look into the said clause and amend it via clarification or amendment so as to avoid future misinterpretation, disputes and litigations.

In nutshell, the following analysis can be drawn from the amendments which are brought under the Finance Act, 2020:

A) if an Indian Citizen / Person of Indian Origin, whose total income (other than income from foreign sources) in India exceeds Rs. 15 lakhs, is liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature and who comes on a visit in India and stays in India for less than 120 days during the financial year, he would be treated as “NON – RESIDENT”.

B) if an Indian Citizen / Person of Indian Origin, whose total income (other than income from foreign sources)exceeds Rs. 15 lakhs and who stays in India for more than 120 days but less than 182 days, he would be treated as “RESIDENT BUT NOT AN ORDINARY RESIDENT”.

C) if an Indian Citizen / Person of Indian Origin, whose total income (other than income from foreign sources) is upto Rs. 15 lakhs during the financial year, then the erstwhile provisions i.e. provisions prior to Finance Act 2020 would be applicable.

D) if an Indian Citizen, whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs during the previous year and 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, he would be treated as “RESIDENT BUT NOT AN ORDINARY RESIDENT”.

Scope of income

Once the residential status of an individual is determined by the above tests, the provisions of section 5 of the Act explain how the income will be taxable in India for that individual. The scope of taxation in India will be based on the Residential Status which is explained in the tabular format hereunder:

Sr. No. Particulars Resident and Ordinary Resident Resident but Not an Ordinary Resident Non – Resident
1. Income received or deemed to be received in India Yes Yes Yes
2. Income which accrues or arises or is deemed to accrue or arise in India Yes Yes Yes
3. Income which accrues or arises outside India from

-Business controlled in India or profession set up in India

– Other Income

Yes

Yes

Yes

No

No

No

4. Foreign Asset Disclosure Requirement under the Income Tax Act, 1961 Yes No No

Conclusion

Each individual will have to check the above residency test in order to evaluate their Residential Status.  An individual will have to analyze the impact of the aforesaid amendments on their tax position in India and evaluate the benefits, if any, available under Double Taxation Avoidance Agreements entered into by India.

The Government has tried to bring in place the best practice of taxing those individuals who were paying nil tax liability or very minimal tax liability on the basis of Residential Status being determined in their respective countries, by introducing section 6(1A) of the Act i.e. the provision of Deemed Residency. However, the purpose of introduction of new section 6(1A) of the Act has not been achieved as the language of the newly inserted section would be open to a lot of litigation, if timely amendments are not brought in place.

Disclaimer

The content of this document is solely for information purposes. The view expressed in the said article by the author does not constitute any professional advice or formal recommendation. Due care has been taken by the author in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept 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.

(Author is Partner with P.A. Dhanbhoora & Co.)

Author Bio

Qualification: CA in Practice
Company: P.A. Dhanbhoora & Co.
Location: Mumbai, Maharashtra, IN
Member Since: 21 May 2020 | Total Posts: 1

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