Residential Status under Income Tax

Are u Resident Indian ? Do you have a Citizen of India ? or your Parents are born in Undivided India ?  You thought what is this silly questions you have asked? But after reading of this article you will definitely reversed your previous question and in a definite mood to either think or preserve your ‘Residential Status’.

I once again repeat my above question to you and insist take your time to answer the above questions.  Although Indian Government brought Citizenship Act in last year but above question does not have any direct relationship with same but indirect way. However, Government/ CBDT may (link both act together) think to take the advantages of the same to spread its wings to All the person who are likely to come under this purview. So think before you react. Residential Status can change on year to year basis so be cautious while saying ‘Yes’ or ‘No’. Do not take it lightly.

As per Section 6 (1) of Income Tax Act, an Individual is said to be “Resident” in India in any previous year, if he satisfies any one of the following conditions:

1. He has been in India during the previous year for a total period of 182 days or more or

2. He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year.

If the Individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions are not satisfied, the said Individuals is a NON-RESIDENT.

NOTES :-

Stay in India means both on Land and in Territorial Waters of India (i.e. up to 12 Nautical Miles into the sea from the India Coastline). Even the stay in a ship or boat moored in the Territorial Waters of India would be sufficient to make the residential resident in India.

It is not necessary that the period of stay must be continuous (for Airplanes Pilate & its Crew) or active nor is it essential that the stay should be at the usual place of residence, business or employment of the Individual.

For the purpose of counting the number of days stayed in India, both the date of departure as well as the date of Arrival are considered to be in India.

Although Residence of an Individual for Income Tax purpose has nothing to do with Citizenship, place of birth or domicile, still some of the deduction are based on Citizenship of you or your Parent (will elaborate this point later on).  Hence you can find a person (especially famous personality) have resident in more than one Countries even though he can have only one domicile.

Exceptions:

The following categories of individuals will be treated as residents only if the period of their stay during the relevant previous year amounts to 182 days. In other words even if such persons were in India for 365 days during the 4 preceding years and 60 days in the relevant previous year, they will not be treated as resident.

1. Indian CITIZENS, who leave India in any previous year as a member of the crew of an Indian Ship or for purpose of employment outside India or

2. Indian CITIZEN or person of India ORIGIN engaged outside India in an employment or a business or profession or in any other vocation, who comes on a visit to India in any previous year.

Indian ORIGIN means A person is said to be of Indian Origin if he or either of his parents or either of his grandparents were born in Undivided India.

Finance Act 2020 make a small but valid amendment in Section 6. It will read as follows.

The exception provided in Explanation 1(b) to section 6 (1) for Indian CITIZENs and person of Indian ORIGIN visiting India in that year has been decreased to 120 days from 182 days, only in cases where the total income of such visiting individuals during the financial year from source other than the Foreign Sources  exceeds INR 15 lakh.

The term ‘Income from Foreign Source’ has been defined to mean Income which Accrue or Arise Outside India (except income derived from a business controlled in or a profession set up in India).

The Finance Bill proposed to streamline the test for RNOR by providing that an individual or an HUF shall qualify as an RNOR if such individual or manager of the HUF has been a non-resident in India for 7 out of the 10 previous years preceding that year. The Finance act 2020 add two categories to the text for RNOR in section 6 (6).

The below persons shall also be RNOR

—-Indian CITIZEN/persons of Indian ORIGIN who meet the threshold and have been in India for a period of more than 120 days but less than 182 days i.e. those Indian CITIZENS/persons of Indian Origin who fulfill the conditions mentioned above in Explanation 1 ( b) to section 6 (1)  and

—-Indian CITIZEN who fulfill the conditions mentioned above in Explanation (1A) to section 6 (1).

The above amendments mean that even where  an Indian Citizen qualifies as Tax Resident u/s 6 (1) of the act but owing to the amendment as mentioned above to explanation 1(b) and explanation 1(A) to section 6 (1),he will still not be taxed on a worldwide basis, even if does exceed the threshold.

Only Individuals and HUFs can be resident but not ordinarily resident in India. All other classes of assesses can be either a resident or non-resident. A not-ordinarily resident person is one who satisfies any one of the conditions specified u/s 6(6).

1. If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or

2. If such individual has during the 7 previous years preceding the relevant previous year been in India for a period of 729 days or less.

In simple terms, an Individual is said to be a resident and ordinarily resident if he satisfies both the following conditions:

1. He is a resident in any 2 out of last 10 years preceding the relevant previous year and

2. His total stay in India in the last 7 years preceding the relevant previous year is 730 days or more.

If the Individual satisfies BOTH the conditions mentioned above, he is a resident and ordinarily resident but if only one or none of the conditions are satisfied, the individuals is a resident but not ordinarily resident.

This is the section applies to Individuals & HUF however Companies would be RESIDENT in India in any previous year if –

1. It is an Indian Company (who are registered with Ministry of Company affairs & who have registered office in India ); or

2. Its place of effective management (POEM) in that year, is in India.

Place of Effective Management to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made. POEM is an internationally recognized test for determination of residence of a Company incorporated in a Foreign Jurisdiction. Most of the tax treaties entered into by India recognized the concept of ‘place of effective management’ for determination of residence of a company as Tie-Breaker rule for avoidance of Double Taxation.

The process of determination of POEM would be primarily based on the fact as to whether or not the Company is engaged in Active Business Outside India.

A Company shall be said to engaged in “active business outside India”

• If the Passive income is not more than 50% of its total income and
• Less than 50% of its total assets are situated in India; and
• Less than 50% of total number of employees are situated in India or are resident in India; and
• The payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

 According to CBDT vide circular no. 8/2017 dated 23.02.2017 also clarified that POEM guidelines shall not apply to a Company having Turnover or Gross receipts of INR 50 Crores or less in  a Financial year.

In International transaction the concept of PE emerge as a vital step to decide the Taxation of the Company. PE (i.e Permanent Establishment) includes a fixed place of business through which the business of the enterprises is wholly or partly carried on. In all the Three Conventions namely UN (United Model), OECD (Organisation for Economic Co-operation and Development ) Model and US (United state of America Model) use PE as the main instrument to establish taxing jurisdiction over a foreigners business activities.

Every Country makes the Treaty to transact with in Foreign Country and also allow other Country’s company to transact in India. This treaty is nothing but mutual understanding between two countries on various matters specially for Tax collection & allowing credit of  such tax to the foreign companies. Article 5 (1) to Article 5 (8) set out the rules for Such PE.

After reading above article the common conclusion is drawn as follows.

The residential Status will be bifurcated as follows.

1. Resident (who fulfills basic Condition).

2. Resident but not ordinary resident. (Who fulfills any of the basic condition and in addition both the additional condition).

3. Non Resident (Who does not fulfill any of the Basic condition).

4. Resident of Indian Origin.

5. Resident whose Parents or Grandparents born in Undivided India.