CA Disha Mehta

Introduction

Union Budget, 2020 exhibits the unrelenting effort of the NDA Government to curb the tax abuse by the person exploiting their non­resident tax status, despite of being citizens of India. The Finance Bill, 2020 brings in anti-abuse measure for the taxpayers who deliberately prearrange their stay in India with an intent to avoid their categorization as Indian residents, thereby avoiding the tax in India. The amendments with respect to the same are summarized here under:

A. Resident and Ordinary resident (‘R&OR’)

Residential status in India as per the Income Tax Act, 1961 (‘the Act’)

Section 6 of the Act enunciates the scope of residential status. As per provisions1 of the said section, an individual is said to be a resident in India in any previous year if he satisfies any of the following conditions:

a. His stay in India for the previous year is 182 days or more2; or

b. (i) His stay in India within 4 years preceding the relevant previous year totals to 365 days or more and (ii) His stay in India for the previous year is 60 days or more.3

Further, Explanation4 to the said section carves out an exception for individuals, being citizens of India or a person of Indian origin who come on a visit to India. For such individuals, ‘60 days’ was substituted for 182 days. The said Explanation was introduced with an intent to allow such individuals to visit India, without triggering Indian tax residency norms and additional compliance requirements.

However, Finance Bill, 2020 brought an amendment to the said Explanation considering that the relaxation granted to them (individuals being citizens of India or a person of Indian origin who come on a visit to India) was misused.

Amendment proposed in Finance Bill, 2020

Finance Bill, 2020 proposes to amend part 2 of the twin condition laid out in the aforesaid Explanation, by substituting 182 days to 120 days, thereby making the provisions stringent.

The amendment is proposed to be applicable from Previous Year (‘PY’) 2020-21 (i.e. AY 2021-22) and subsequent years.

Analysis  

The said amendment can be summarized as under:

Particulars Stay in India during    Previous
Year
Stay in India during 4 years      preceding      the
relevant previous year
Residential status as per existing provisions of the Act Residential status as per proposed amendment in Finance Bill, 2020
Illustration 1 100 365 Non-resident Non-resident
Illustration 2 125 365 Non-resident Resident
Illustration 3 182 365 Resident Resident

As can be seen from Illustration 2 above, if stay of individual in India during previous year equals/ exceeds 120 days and 365 days in 4 years immediately preceding the previous year, he shall be considered as R&OR in India and accordingly, global income shall be taxed in India.

The amendment is categorically introduced to include those individuals who tactically managed their stay in India to circumvent the tax liability, despite of having significant economic activities in India.

B. Deemed Resident

Finance Bill, 2020 proposes to insert a new clause5 subsequent to clause (1) of section 6, which states as under:

“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”

It is pertinent to note that the said clause begins with a non-obstante words which is to say that irrespective of the conditions referred to in clause (1), an individual shall be deemed to be resident if he is a citizen of India and not liable to tax in any other country for reasons specified thereunder. The said amendment is brought with an intention to widen the tax base for those individuals who enjoy double non-taxation for the reason of their residential status as they shift their stay to a tax haven country or no tax jurisdiction to avoid payment of tax in India.

Further, it has brought jitters amongst the bonafide citizens of India, working outside India (classified as Non-resident) including workers/ individuals who are not taxed in any of the countries as they may be taxed in India.

However, for the purpose of clarification and removal of doubts, the Central Board of Direct Taxes (‘CBDT’) issued a press release dated 2 February 2020 which explicitly mentions that the income earned outside India by citizens’ deemed to be Indian resident, shall not be taxed in India unless the same is derived from business or profession in India. In other words, if an individual, being deemed resident in India derives income outside India from business or profession in India will be taxed in India.

The amendment is proposed to be applicable from PY 2020-21 i.e. AY 2021-22 and subsequent years.

C. Not Ordinary resident (‘NOR’)

Residential status in India as per the Act

Subsequent to classification as a ‘resident’, an Individual shall determine whether he is R&OR or NOR. It is essential to mention here that only those income which is sourced in India shall be chargeable to tax for a resident but not ordinarily resident. However, for R&OR, his global income shall be taxable.

As per the existing provisions of the Act6, an individual/Hindu Undivided Family (‘HUF’) shall be considered as a R&OR if any of the following conditions is satisfied –

a. He/ manager (in case of HUF) was a resident in India in at least 2 out of 10 previous financial years immediately preceding the current financial year7; or

b. His/ manager’s (in case of HUF) cumulative stay in India is 730 days or more during the 7 financial years immediately preceding the current financial year 8.

In case the said conditions are not satisfied, he shall be considered as NOR for the purpose of Indian Income tax.

Amendment proposed in Finance Bill, 2020

It is proposed to substitute the following condition in place of the aforementioned conditions for classification of NOR: An individual shall be considered as R&OR if such person is –

a. He should be a resident in India in at least 4 out of 10 previous financial years immediately preceding the current financial year; or

b. A HUF whose manager has been a resident in India in atleast 4 out of 10 previous financial years immediately preceding the current financial year.

Accordingly, the condition for cumulative stay in India is 730 days or more during the 7 financial years immediately preceding the current financial year has been deleted vide the proposed amendment.

Further, the amendment is proposed to be applicable from PY 2020-21 (i.e. AY 2021-22) and subsequent years.

Analysis  

Although the said amendment proposes to streamline the provisions with respect to NOR, it may extend the extent of classification of individuals as R&OR, who previously did not fall within the erstwhile bracket, thereby widening the scope of number of individuals that could be taxed as R&OR, whose global income shall be chargeable to tax.

Conclusion

Restriction of the scope of 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 might bring a nerve-wracking situation amongst the non-resident individuals who benefited with the higher stay in India for the economic benefits as they may now qualify to be a resident.

Government’s unanticipated initiative to prevent tax abuse and widen the tax base may arguably increase its avenues to tax those who sought to exploit the provisions of the Act.

Further, as referred to in the budget documents, the arrangement of “stateless persons” is typically adopted by High Net worth individuals. Curtailment of such double non-taxation may require such individuals to analyse the tax implication in the host country and India and consequently compel to pay taxes due for income earned abroad from business/ profession in India

Relaxation of provisions with respect to NOR is a welcome move to reduce undue complications. However, the same may widen the scope of persons falling within R&OR category, thereby taxing their global income.

Notes:

1 sub-section (1) to section 6 of the Act

2 clause (a) to sub-section 1 of section 6

3 clause (c) to sub-section 1 of section 6

4 clause (b) to Explanation 1

5 clause (1A) to section 6 of the Act

6 sub-section (6) to section 6 of the Act

7 clause (a) to sub-section 6 of section 6

8 clause (b) to sub-section 6 of section 6

(Author can be reached at disha_mehta91@yahoo.in)

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