Residency of Individual Income Tax Act and recent developments

Introduction:

The determination of residency is first step in the whole process of finalizing tax aspect of certain transaction. One need to ascertain that if any income is accrue/arise or deemed to accrue/arise in India in terms of Section 4,5 and 9 of Income tax Act.  However, before determining the same, one need to decide the residential status of person in whose hands such income is taxable.

The principles with regard to residential status of person provided in section 6 of Income Tax Act (‘ITA’/’the Act’). Section 6 is mooting point to determine the taxability of income as per the Act.

Section 6 is part of Indian Income Tax Act since inception and predominately did not altered for long time. With advent of recent development in tax arena, new ideas to shift shift residency (primarily by individuals), situation emerges after COVID-19, the aforesaid section has seen some recent amendments in the Finance Act.  In this article we discuss basic as well as additional principles to determine residency of individuals, recent amendment made by Finance Act 2020 and recent global trends post Covid etc.

1. Residential Status of Individuals as per Income Tax Act (Section 6 of Income Tax Act)

The Act provides for three categories of residential status in India as per section 6 of Income Tax Act – Resident, Not ordinarily resident and Non-resident. As per definition contained in section 2(42) resident means a person who is resident in India within the meaning of section 6 of Income Tax Act. Non Resident has been defined in section 2(30) of the Act as non resident, inter alia means a person who is not a resident within the meaning 6 of Income Tax Act.  The provision to determine residential status of individual assessee as per section 6 is as under;

1. The basic condition to become resident by individual that he/she must be India (physically present) in India for 182 days or more during the financial year. [Section 6(1)(a)]

2. If aforesaid condition is not fulfilled and individual is in India for 60 days in India during current previous year and also in India for 365 days or more in four previous year preceding to previous years, he shall be regarded as resident. The above said condition of 60 days contained in basic conditions will be substituted by 120 days where the citizen of India or person of Indian origin has income other than income from foreign sources exceeding Rs.15 lakhs. In effect, the Indian income must exceed Rs.15 lakhs [Section 6(1)(c)].

There is two exception to aforesaid general rule in respect of number of days stay in India to determine the tax residency in India, which are as under;

(i) Person leaving India for employment: In case of an individual who is citizen of India, leaves India for the purpose of employment, the number of days of stay during the previous year must be 182 days or more instead of 60 days or more in above condition.

(ii) Citizen or persons of Indian origin coming on visit to India A person being a citizen of India or a person of Indian origin being outside India comes on a visit to India, the number of days of stay during the previous year shall be taken as 182 days or more instead of 60 days given in (ii) above of basic conditions.

The aforesaid two conditions are pragmatically called as basic conditions to determine the tax residency of Individual in India.

3. Further a resident is classified as not ordinary resident if he is non-resident in 9 out of 10 years preceding to previous years or has been in India for 729 days or less in India in the seven years preceding to previous years. In other words, to become an ordinary resident, individual is required to fulfil both the above conditions. [Section 6(6)]

The conditions mentioned above are called as Additional conditions to determine the tax residency of Individual in India.

The term ‘ordinary resident’ is not defined in the act. There are certain tax implication in terms of individual having different residential status viz. Resident, Not ordinary resident and Non Resident.  Global Income of Resident is taxable in India. However, in case of Non Resident Income received or deemed to be received or accrue or arise or deemed to accrue or arise shall be taxable in India.

2. Amendments by Finance Act 2020:

a) Stateless person/Deemed Residency: [Section 6(1)(A) and Section 6(6)(d]

The Finance Act, 2020 has inserted section 6(1A) to Income Tax Act, which provides that an individual, being citizen of India having total income (excluding income from foreign sources) in excess of Rs.15 lakhs shall deemed to be resident in India provided he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria or similar nature. It was further clarified that the above provision of Deemed Residency shall not applicable if individual has become resident in terms of section 6(1) of the Act itself.

It was further amended by Finance Act 2020, by inserting 6(6)(d) to provide that an individual who becomes resident as per deemed residency provision contained in section 6(1)(A), he shall be treated as Not Ordinary Resident only . The meaning there of that his income sources from India shall be taxable and income accrue or arise outside India shall not come in tax net of Indian Income Tax Act.

b) Citizen of India or Person of Indian Origin who visits India [Section 6(6)(c)]

The amendments made by Finance Act 2020 further provides that a  citizen of India who stay in India for 120 days or more in India and having total income other than income from foreign sources exceeding Rs.15 lakhs during the previous year shall be treated as resident but not ordinarily resident.

The condition stipulated in section 6(6)(c) is exclusive of conditions stipulated above in point number 3.

The different scenario to determine residential status discussed above are summarized as under:

If a citizen of India has stayed for more than 120 days but less than 182 days who satisfies (ii) of the basic condition [see clause (b) of the Explanation 1 to section 6(1) ] is covered by section 6(6)(c) and would be deemed to be resident but not ordinarily resident on the condition his income other than income from foreign sources exceeds Rs.15 lakhs.

If a citizen of India has stayed for less than 120 days and having income other than income from foreign sources exceeding Rs 15 lakhs, but who does not satisfy any of the basic conditions of section 6(1) would be non-resident and the recent changes do not impact residential status.

When a person is treated as resident but not ordinarily resident in which case his income outside India from a business controlled in or profession set up in India will be chargeable to tax. His other income from foreign sources would continue to remain outside the tax net.

Explanation to section 6(6) says that the expression “income from foreign sources” would mean income which accrues or arises outside India except income derived from a business controlled or a profession set up in India and which is not deemed to accrue or arise in India.

3. Some Judicial precedents/Other points

a) Reference may be made to CBDT Circular No. 13/2017 dated 11th April, 2017 and Circular No.17/2017 dated 26th April, 2017 stating that salary for services rendered outside India on a foreign going ship by non-resident seafarers credited to NRE account maintained in India shall not be included in the total income merely because the salary was credited directly to the bank account maintained in India.

b) It was held by Delhi Tribunal in case  of Additional Commissioner  of Income Tax vs  Sudhir Choudhrie [2017] 88 taxmann.com 570 that residential status of assessee is to be determined solely on basis of number of day she is present in India. And other facts like ‘economic presence’ and ‘legal presence’ are irrelevant as same are not recognized by provisions of section 6.

c) Reference is dawn in case of In CIT v O. Abdul Razak [2011] 10 taxmann.com 4/198 Taxman 1/337 ITR 350 (Ker.) it was held that the term ’employment’ used in section 6(1)(c) should not be ascribed technical meaning. Even, self-employment like business or profession could also be covered within the term.

4. CBDT Circulars in respect of forced stays in India

a) CBDT Circular No. 11 of 2020 dated 8th May 2020 for FY 2019-20

CBDT vide circular number 11 of 20202 dated 08^th May 2020 has provided partial relief for determining tax residency for the purpose of section 6 of Income tax Act. The CBDT Circular provided that individuals who had visited India before 22nd March, 2020 but has been unable to leave before 31st March, 2020, the period from 22nd March, 2020 to 31st March, 2020 would not be taken into account in calculating his / her residential status under the India.  Further, an individual who had visited India before 22nd March, 2020 and had been quarantined in India (on or before 1st March, 2020), the period from the date of his quarantine till the date of his departure (if unable to leave, the period till 31st March, 2020) shall not be considered for the purposes of determining his / her residency under the Act.

b) CBDT CIRCULAR NO. 2 OF 2021 dated 03.03.2021 for FY 2020-21

The aforesaid Circular issued by CBDT did not provide any much relief to individuals who had come on a visit to India during FY 2019-20 and intended to leave India but could not do so due to suspension of international fights seeking further relaxations in the conditions applicable for determining the residential status of an individual under the Act.

The Board dismissed requests and stated that the current provisions dealing with the determination of residential status under the ITA read with the various Double Taxation Avoidance Agreements (“DTAA”) that India has entered into with other countries has contain sufficient safeguards for preventing the individuals from being subjected to double taxation in the PY 2020-2021.

The view made by CBDT is in line with guidelines issued  by OECD(The Organization for Economic Cooperation and Development ) which inter alia provides that in case of dual residency of individual due to forced stay under domestic law, the situation would remain same for treaty provision and tie breaker  rule provided in  relevant tax treaty would be there to safeguard person from dual taxation.

5. Conclusion.

In recent years, there is lot of buzz has been heard in respect of international taxation arena especially new terms being coined viz. MAP, MLI, DRP, TP, GAAR, equalization levy. It has become arduous task to be at right side of law at thick and thin of such fast-paced changes. In amidst all of this, Tax professional are required to give thorough thought to recent changes being made to section 6 by way of insertion of sub-section (1A) is backed up by section 6(6) (d). The Changes in law is objected to mitigate the impact and impliedly addressed the concerns of Indian citizens located in tax-free jurisdictions. Where the employees are located in jurisdiction with whom DTAA exists, the amendments would be subject to the contents of the respective treaty.