Residential Status Provisions of Income Tax Act, a paramount element for International Taxation
The taxation of Foreign Nationals and Non-Resident Indians is governed by various provisions of Income Tax Act, 1961. Every provision of Income Tax Act, 1961 governing international taxation is an autonomous framework in itself. To understand and get a good grasp of the same, the primary objective should be to identify who will be taxed, which can be done by appreciating the difference between Indian nationals and Foreign Nationals on the basis of their residential status. Under current Income Tax Act, residential status of an assessee decides the purview which will cover taxability of income in India The residential status under Income Tax Act is determined as per Section 6, which dictates the following procedure to determine residential status:-
Individual
- First option provides that an individual is deemed to be resident if stay in India is more than 182 days during the year under consideration.
- The second alternative says that if stay in India during immediately preceding 4 years is 365 days or more and with this, stay during the year under consideration is 60 days or more, then also individual is deemed to be resident.
- For second alternate, in case of:-
- Indian citizens who are crew of foreign bound Indian ship;
- Indian citizens leaving for employment overseas;
- NRIs/POIOs who have come to visit India, the condition of stay during the year under consideration will be 182 days or more instead of 60 days.
- Similarly, in case of NRIs whose income from Indian sources is above 15 Lakhs, the conditions of stay during the year will be 120 days or more. These Individual are always deemed to be Not Ordinarily Residents.(Discussed later)
- NRIs/POIOs, who are not liable to tax in any other country and their income from Indian sources exceed 15 Lakhs, they will be deemed resident and liable to Income Tax in India, irrespective of period of stay. These Individuals are always deemed to be Not Ordinarily Residents.(Discussed later)
HUF/Firms/AOP/BOI/AJP etc.
These assessees are deemed to be resident in India, except when their control of management and affairs is outside India.
Ordinary v/s Not Ordinary Residents
The second level bifurcation on basis of residential status is only applicable to Individuals and HUF, through the status of their Karta. An individual or HUF who is Resident for year under consideration, is further tested for being Resident but Not Ordinarily Resident or Resident & Ordinarily Resident.
An Individual or HUF who is resident, will be considered Not Ordinarily Resident only if, Individual or Karta of HUF is:-
- Non Resident for 9 years out of ten years preceding the year under consideration
Or
- Stay in total is 729 days or less during seven years preceding the year under consideration.
In all other cases except above, Individual or HUF will be considered Resident & Ordinarily Resident, and the purview of income will determined accordingly.
Companies
- Companies incorporated under Indian Laws are always deemed to be resident.
- For foreign companies, their POEM (place of effective management) i.e. location where key managerial decisions are taken must be in India to be resident.
The concept of POEM determination was introduced into Indian Income Tax system with effect from 01.04.2017. This method was effected as a tool to hinder practice of tax avoidance by companies through shifting their management activities outside India. The concept of POEM is globally recognized by various tax jurisdictions with whom Indian has entered into tax treaties.
Purview of Income under Tax Charge
The next basic step is to determine the purview under which the income of a particular year will be taxed in India. The Income Tax Act, 1961 through Section 5 lays down the framework which decides purview of income taxable in India.
- In case of Resident & Ordinarily Residents, income earned or accrued, irrespective of its source i.e. whether from India or from foreign source, is taxable under India Income Tax Law.
- For Not Ordinarily Residents, income earned or accrued outside India, shall not be taxable in India. But, there is an exception to this case, which provides that if income which is earned or accrued outside India, is generated from a business or profession set up and controlled in India, then such income also, shall be taxable in India.
Assessees who are non-residents, are liable to pay income tax in India only, on the income which accrues or arises in India. Also, the income which is deemed to accrue/arise in India during the year under consideration is also liable to charge of tax in India. In brief, the deeming provisions, which are enshrined under Section 9, obligate few categories of incomes to be deemed to be accrued or arise in India. The discussion regarding the deeming provisions cannot be covered in this article as Section 9, which covers the relevant provisions, is in itself a complete, detailed and vast framework and I will try to discuss it later in future.
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