Modification of residency provisions.

Sub-section (1) of section 6 of the Act provide for situations in which an individual shall be resident in India in a previous year. Clause (c) thereof provides that the individual shall be Indian resident in a year, if he,-

(i) has been in India for an overall period of 365 days or more within four years preceding that year, and

(ii) is in India for an overall period of 60 days or more in that year.

Clause (b) of Explanation 1 of said sub-section provides that an Indian citizen or a person of Indian origin shall be Indian resident if he is in India for 182 days instead of 60 days in that year. This provision provides relaxation to an Indian citizen or a person of Indian origin allowing them to visit India for longer duration without becoming resident of India.

Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year, is being misused. Individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.

Sub-section (6) of the said section provides for situations in which a person shall be “not ordinarily resident” in a previous year. Clause (a) thereof provides that if the person is an individual who has been non-resident 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 an overall period of 729 days or less. Clause (b) thereof contains similar provision for the HUF.

This category of persons has been carved out essentially to ensure that a non-resident is not suddenly faced with the compliance requirement of a resident, merely because he spends more than specified number of days in India during a particular year. The conditions specified in the present law in respect of this carve out have been the subject matter of disputes, amendments and further disputes. Further, due to reduction in number of days, as proposed, for visiting Indian citizen or person of Indian origin, there would be need for relaxation in the conditions.

The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

In the light of above, it is proposed that-

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

(ii) an individual or an HUF shall be said to be “not ordinarily 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.

(iii) an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years.

[Clause 4]

Extract of Relevant Clauses of Finance Bill, 2020

Clause 4

“Clause 4 of the Bill seeks to amend section 6 of the Income-tax Act relating to residence in India.

Clause (1) of said section provides for situations in which an individual shall be resident in India in a previous year. Sub-clause (c) thereof provides that the individual shall be Indian resident in a year, if he 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. Clause (b) of Explanation 1 of said clause provides that in case of an individual being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C of the Income-tax Act, 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.

It is proposed to amend said sub-clause (b) of said Explanation 1 so as to substitute the words “one hundred and eighty-two days” with “one hundred and twenty days”.

It is proposed to insert clause (1A) in said section after clause (1) thereof so as to provide that notwithstanding anything contained in that sub-section, an individual, being a citizen of India, shall be deemed to be resident in India in any 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.

Clause (6) of said section provides for situations in which a person shall be “not ordinarily resident” in India in a previous year. Sub-clause (a) thereof provides that if such person is an individual, he shall be “not ordinarily resident” in India if he 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. Sub-clause (b) thereof contains similar provision in case of manager of the Hindu undivided family.

It is proposed to substitute said clause (6) so as to provide that an individual or an Hindu Undivided Family shall be said to be “not ordinarily resident” in India in a previous year if the individual or the manager of the Hindu Undivided Family, as the case may be, has been a non-resident in India in seven out of ten previous years preceding that year.

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

4. Amendment of section 6.

In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,––

(a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty-two days”, the words “one hundred and twenty days”shall be substituted;

(b) after clause (1), the following clause shall be inserted, namely:–

“(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any 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.”;

(c) for clause (6), the following clause shall be substituted, namely:–

‘(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 seven out of the ten previous years preceding that year; or

(b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.’.

Source- Finance Bill 2020 / Union Budget 2020-21

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