WE, Indians believes in our ancient phrase “VASUDEV KUTUMBKAM” and treat this globe a part of family. Globalisation has changed the world trade to a great extent but similarly pose a great challenge in taxation and one of the most common challenge is determination of Residential status of a person.
Taxability of a person is largely dependent on residential status. The Indian Government had also brought out major changes in provisions related to determination of residential status in last year. Section 6 of Income Tax Act Contains the provisions related to determination of residential status.
Basically there are two types of residential status being resident and non-resident in most country’s tax law like of Indian Tax law. Though Indian Tax Law also created Sub status of RESIDENT for certain categories of persons.
Section 2(42) contains the definition of resident means a person who is resident within the meaning of section 6 of the Act.
As usual, Non-resident has been defined u/s 2(30) means a person who is not a resident and for the purpose of section 92,93 and 168 includes a person who is not ordinary resident within the meaning of clause (6) of section 6 of the Act. It means that RNOR (Resident but not ordinary resident) shall be treated as non-resident under Income Tax Act for following purposes though otherwise that person is RNOR: This is very important definition and one should keep this in mind while making any planning.
- Computation of income from international transaction having regard to arm’s length price. This means that despite having residential status, All transactions should be passed through determination of Arm’s length criteria and provisions related to international taxation shall be equally applicable. For example, if a person has paid salary or interest to RNOR being associated enterprises, than salary and interest is required to be calculated at arm’s length on six method as per section 92C. Audit provisions u/s 92E and other provisions shall also be equally applicable.
- Avoidance of income tax by transactions in transfer of income to Non Resident means thereby that if a person transfer certain assets located outside India to RNOR for avoidance of tax liability because income received outside India shall not be taxable in India for RNOR which is otherwise taxable to resident but RNOR shall be treated as NON Resident for this purpose and such transfer shall be void.
- In case of taxation to Executor u/s 168, RNOR shall be treated as resident only.
Section 6 of Income Tax Act stipulates provisions related to various conditions under which a person shall be treated as RESIDENT be it ordinary or not ordinary resident.
DETERMINATION OF RESIDENTIAL STATUS OF INDIVIDUAL:
In case of an individual, two steps are required to be performed for determination of residential status:
| S No of Step | Outcome of Step |
| First | Whether Resident or non-Resident.
Determination of residential status through normal approach or Deemed Resident approach. |
| Second
|
If a person is considered as resident than
Whether one is ordinary resident or resident but not ordinary resident. |
Step 1: Whether resident or non-resident:
Determination of residential status is further decided on two ways or approach:
(1) Normal Resident status based on period of stay etc
(2) Deemed Resident Status based on income and taxability in other country
Determination of resident status through normal approach:
Under the Income-tax Law, an individual shall be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):
| Person is in India for a period of 182 days or more in India | AND/OR | Person is in India for a period of 60 Days or more in the year and,
Person is in India for a period of 365 days or more in 4 years immediately preceding the relevant year. |
If a person is qualified to be a resident due to operation of second criteria than he should satisfied both the sub condition enumerated in the criteria.
As the period of 60 days are very short period for certain classes of persons hence exception is provided to three types of persons that 60 days provided in second criteria shall be treated as 182/120 days in following classes of persons:
| Classes of Persons | Purpose of Journey/Visit
|
No of days to be considered instead of 60 Days |
| Indian Citizen or person of Indian Origin comes to India
|
Any Purpose | 182 Days |
| Indian Citizen who leaves India in any previous year | As a crew member of Indian Ship or,
For the purpose of employment |
182 Days |
| Indian Citizen or person of Indian Origin comes to India and having total income exceeding Rs 15 Lacs.
Total income shall not include income from foreign sources.
|
Any Purpose | 120 Days |
Fortunately, the word India is defined u/s 2(25A) of the Act and likewise it is also suitably clarified that the person shall be treated as Indian Originated if he himself, any of his parents or grans parents was born in undivided India.
Determination of resident status through Deemed approach(Deemed Resident)
An Indian citizen shall be deemed to be resident in India if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year only and he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
(a) Resident and Ordinary Resident (ROR): A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies both the following conditions:
| S No | Nature of condition | Criteria of satisfaction |
| 1 | Resident status in India | At least 2 years out of 10 year immediately preceding the relevant year, and |
| 2 | Stay in India | 730 Days or more during 7 years immediately preceding the relevant year. |
(b) Resident but not Ordinary Resident (RNOR): A resident individual will be treated as resident but not ordinarily resident in India during the year if he satisfies any of the following conditions:
| S No | Nature of condition | Criteria of satisfaction |
| 1 | Non Resident Status in India | At least 9 out of 10 years immediately preceding the relevant year, or |
| 2 | Stay in India | 729 days or less during 7 years immediately preceding the relevant year. |
| 3 | Citizenship, Income and period of Stay | Indian Citizen or person of Indian Origin and having total income exceeding Rs 15 Lacs and stay in India between 120-181 days. |
| 4 | Deemed Resident | Deemed Resident shall always be treated as RNOR. |
In short, following test will determine the residential status of an individual:
- If the individual satisfies any one or both the conditions specified at step 1 and satisfies both of the conditions specified at step 2(a), then he will become resident and ordinarily resident in India.
- If the individual satisfies any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2(b), then he will become resident but not ordinarily resident in India.
- If the individual satisfy no conditions satisfied at step one, then he will become non-resident.
Example: Mr. Giri went USA for employment first time on 3rd August 2018 and return back to India permanently on 12th Oct 2020. His total income in FY 2020-21 is more than 15 Lacs. What will be the residential status of XYZ for AY 2021-22.
Since Mr Giri is an Indian Citizen who comes to India on 12th Oct 2020. His stay in India during AY 2021-22 falls between 120-182 Days coupled with the fact that his income is more than 15 Lacs. He was in India for 365 days or more in 4 years immediately preceding year to the AY 2021-22. Hence Mr Giri will be resident by virtue of third exception of second criteria of basic condition but Mr Giri will be resident but not ordinary resident (RNOR) by virtue of s no 3 of step 2(b) above.
DETERMINATION OF RESIDENTIAL STATUS OF HUF/AOP/FIRM:
To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident.
Step 1: Determining whether resident or non-resident
For the purpose of Income-tax Law, a HUF/AOP will be treated as resident in India, if the control and management of the affairs of the HUF is located partly or wholly in India. If the control and management of the affairs of the HUF is wholly located outside India than it will be treated as non-resident.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the condition given in step 2(a) of individual given here above.
A resident HUF whose manager (i.e. karta or manager) satisfies any of the conditions given in step 2(b) will be treated as resident but not ordinarily resident.
DETERMINATION OF RESIDENTIAL STATUS OF COMPANY
A company is said to be resident in India in any previous year, if:
(i) it is an Indian company; or
(ii) its place of effective management, at any time in that year, is in India.
For this purpose, the “place of effective management” means a place where necessary key management and commercial decisions of an entity as a whole are made in its letter and substance.
The CBDT has issued the final guidelines for determination of POEM of a foreign company in circular no 6/2017 dated 24/01/2017.
The final guidelines on POEM contain some unique features. One of the unique features is test of Active Business Outside India (ABOI). The guidelines prescribe that a company shall be said to engaged in ‘active business outside India’ if passive income is not more than 50% of its total income. Further, there are certain additional cumulative conditions to be satisfied regarding location of total assets, employees and payroll expenses.
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two stage process, namely:—
- First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
- Second stage would be determination of place where these decisions are in fact being made.
However, it has been provided that the POEM guidelines shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year vide CIRCULAR NO.8, DATED 23-2-2017.
POSITION OF STAY IN INDIA DURING COVID 19:
FOR FY 2019-20 (A Y 2020-21)
Considering the COVID-19 pandemic and the resultant overstay of an individual who had come to India on a visit before 22nd March 2020, circular no II of 2020 dated 8th May 2020 was issued by the Central Board of Direct Taxes and It was clarified that for the purpose of determining the residential status under section 6 of the Act during the previous year 2019-20 in respect of an individual who has come to India on a visit before 22nd March 2020 and:
(a) has been unable to leave India on or before 31 st March 2020, his period of stay in India from 22nd March 2020 to 31 st March, 2020 shall not be taken into account; or
(b) has been quarantined in India on account of Novel Corona Virus (Covid-19) on or after 1st March, 2020 and has departed on an evacuation flight before 31st March 2020 or has been unable to leave India on or before 31st March 2020, his period of stay from the beginning of his quarantine to his date of departure or 31 st March, 2020, as the case may be, shall not be taken into account; or
(c) has departed on an evacuation flight before 31st March 2020, his period of stay in India from 22nd March 2020 to his date of departure shall not be taken into account.
FOR FY 2020-21 (A Y 2021-22)
The CBDT has issued clarification on this matter vide circular no 2/2021 dated 3rd March 2021 that no such relaxation will be given for FY 2020-21 on the following grounds:
OECD as well as most of the countries have clarified that in view of the provisions of the domestic income tax law read with the DTAAs, there does not appear a possibility of the double taxation of the income for PY 2020-21. The possibility of double taxation does not exist as per the provisions of the Income-tax Act, 1961 read with the DTAAs. However, in order to understand the possible situations in which a particular taxpayer is facing double taxation due to the forced stay in India, it would be in the fitness of things to obtain relevant information from such individuals. After understanding the possible situations of double taxation, the Board shall examine that, –
(i) whether any relaxation is required to be provided in this matter; and
(ii) if required, then whether general relaxation can be provided for a class of individuals or specific relaxation is required to be provided in individual cases. Therefore, if any individual is facing double taxation even after taking into consideration the relief provided by the respective DTAAs, he may furnish the information in Form -NR annexed to circular latest by 31st March, 2021. This form shall be submitted electronically to the Principal Chief Commissioner of Income-tax (International Taxation).
IMPORTANCE OF RESIDENTIAL STATUS: Determination of residential status is very important because resident who is ordinary resident has to pay tax on his worldwide income though he can claim benefit of DTAA whereas non-resident or resident but not ordinary resident (RNOR) has to pay tax only on that income which has been sourced from India or received or earned in India.
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