Residential Status of people unable to leave India due to COVID-19

Indian Government has issued a Circular No. 2 of 2021 dated 3^rd March, 2021 (Circular 2021) for determination of residency of individuals for the current tax year (PY 2020-2021) for individuals who were forced to remain in India due to suspension of international flights in light of the Novel Corona Virus (COVID-19). Circular 2021 comes as a follow up to the Circular No.  11 of 2020 dated 8^th May, 2020 (Circular 2020) where it was clarified that the period from March 22, 2020 to March 31, 2020 (or a date prior to March 31, 2020 as applicable) would be excluded in determining the residential status of an individual for the purposes of the Income Tax Act, 1961 (the Act).

Section 6 of the Act contains provisions relating to determination of residency of a person. The status of an individual, as to whether he is resident in India or a non-resident or not ordinarily resident, is dependent, inter-alia, on the period for which the person is in India during a previous year or years preceding the previous year.

There are number of individuals who had come on a visit to India during the previous year 2019-20 for a particular duration and intended to leave India before the end of the previous year for maintaining their status as non-resident or not ordinary resident in India. However, due to declaration of the lockdown and suspension of international flights owing to outbreak of COVID-19, they are required to prolong their stay in India. Concerns have been expressed by these individuals that this extra stay in India may make them a resident of India under section 6 of the Act.

In order to avoid genuine hardship in such cases, the Board, in exercise of powers conferred under section 119 of the Act, has provided by way of Circular-2020 that for 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, where 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.

Further, in respect of financial year 2020-21, Circular-2021 provides that various representations have been received by the CBDT from individuals who had come on a visit to India during the previous tax year (i.e. between April 1, 2019 and March 31, 2020) 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.

However, it is submitted that the Government essentially dismissed these requests by clarifying that the current provisions dealing with the determination of residential status under the Act read with the various Double Taxation Avoidance Agreements that India has entered into with other countries contain sufficient checks and balances for preventing the individuals from being subjected to double taxation in the PY 2020-2021.

As per government points of view, general relaxation may lead to dual non-residency. Most of the countries have the condition of stay for 182 days or more for determining residency. Thus, a person in most situations will be resident in only one country since there are 365 days in a year. In fact, if general relaxation for the stay period of 182 days is provided, there may be cases of double non-residency. In such situation, a person may not become a tax resident in any country in PY 2020-21 even after staying for more than 182 days or more in India resulting in double non-taxation and end up not paying tax in any country.

Further, the Government does not consider short stay as residency. Circular 2021 clarifies that that the conditions provided under the Act for assessing an individual as an Indian resident, requires a sufficiently long duration of stay before declaring an individual as an Indian resident (usually a stay of 182 days or more in a tax year). It goes on to assume that in such a situation there are less chances that the person would acquire resident status under the Act for the current tax year. It further reiterates the provisions of residency as specified under the Act and gives instances when an Indian citizen or an individual of Indian origin would be considered to be an Indian resident under the Act.

There exist Tie breaker rule as per Double Taxation Avoidance Agreement (DTAA). A person may become resident in India in some cases even if he stays for less than 182 days in India. In that situation, there may be a case of dual residency. However, due to applicability of DTAA, such person will become resident of only one country as per the “tiebreaker rule” in the DTAA. For instance, Article 4(2) of the Indo-USA DTAA provides for a tie-breaker rule which takes into consideration various alternative factors like a permanent home, Country of vital interests, country of habitual abode, nationality etc. in determining the residency of an individual in cases of dual-residency.

Further, taxability of employment income is subjected to the conditions under the DTAA. Circular 2021 further highlights the fact that the DTAAs provide for certain conditions that need to be fulfilled before assessing the tax on the employment income earned during a tax year. For instance, Article 16 of the Indo-USA DTAA provides that salaries, wages, and other similar remuneration are taxable only in the country in which the employee is resident unless the employment is exercised in the other country.

Generally, as per the DTAAs, such other country (the source jurisdiction) has taxation rights only if the employee is present in that country for more than 183 days or the employer is a resident of the source jurisdiction, or the employer has a permanent establishment in the source jurisdiction that bears the remuneration. Accordingly, if a USA resident under employment of a USA corporation has got stranded in India and performs employment from India, its salary will not be taxable in India unless he is present in India for 183 days or more during the PY 2020-21 or if the salary is borne by Indian permanent establishment of such USA corporation.

Further, Circular 2021 provides that a resident person in India shall be entitled to claim credit of the taxes paid in any other country in accordance with the rule 128 of the Income-tax Rules, 1962. Therefore, it would be helpful in case of an individual becomes a resident under the Act because he was forced to remain in India due to the pandemic.

 Remarks: Please note that Circular 2021 provides no real relief to individuals stranded in India and forced to stay in India due to the pandemic. However, Government has concluded in Circular 2021 that it can be seen that 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. As explained in Circular 2021, 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 this circular by 31st March, 2021. This form shall be submitted electronically to the Principal Chief Commissioner of Income-tax (International Taxation).

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