Circular Loop of section 6(1A) and section 5 of Income Tax Act and unintended anomaly of section 6(1A)
Executive Summary
The Finance Act, 2020 made several amendments in the provisions of the section 6 of the Income-tax Act, 1961 (Act) with aim to bring the stateless person (an individual who is citizen of India and having income other than foreign source more than Rs. 15 Lakhs) in tax net of the India. However, such amendments created unintended loop between the provisions of the section 6 of the Act viz a viz section 5 of the Act (i.e. Residential Status and Scope of Total Income respectively) which is discussed in this article. Further, section 6(1A) has also created the unintended anomaly which is also discussed in this article.
Scheme of the Income tax Act
♦ The provisions of the section 4 (Charge of income-tax), section 5 (Scope of total income) & section 6 (Residence in India) are pillars of the Act.
♦ The proper course to determine income tax liability is;
- First to determine residential status – (Section-6)
- Based on residential status, decide the scope of the total income – (Section-5)
- And then move to charging section to determine tax liability on total income – (Section-4)
♦ However, newly introduced provisions of section 6(1A) has created an unintended loop between 6(1A) and section 5, which is discussed as hereinunder.
Provisions of newly introduced section 6(1A) read with section 5 of the Act
♦ The newly introduced section 6(1A) of the Act, provides as under;
Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that 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
♦ Further, the provisions of the section 5 of the Act provides as under;
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
♦ As seen from the above, the provisions of newly introduced section 6(1A) itself contains the reference to total income (i.e. section 5). However, section 5 determine the scope of total income based on the residential status.
♦ Therefore, what to determine first? Residential Status or Total Income? Hence, the newly introduced provisions of section 6(1A) has created the unintended and non-ended circular loop between two chronological provisions.
Unintended anomaly of section 6(1A)
- Section 6(1A) of the Act has been introduced with the intent to cover the stateless person (an individual who is citizen of India and having income other than foreign source more than Rs. 15 Lakhs) in tax net of the India.
- Therefore, an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that 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.
- However, as per provisions of the section 6(6)(d), the person covered by the provisions of the section 6(1A) shall be treated as Not Ordinary Resident.
- Section 6(1A) of the Act starts with “Notwithstanding anything contained in clause (1)” that means section 6(1A) overrides section 6(1) of the Act. Section 6(1) contains the provisions w.r.t. determination of the residential status of an Individual.
- Due to overriding effect of the Section 6(1A), the person whose total income is more than Rs. 15 lakhs then such person shall also be governed by the provisions of the section 6(1A) even if he / she is resident as per provisions of the section 6(1) and consequently he / she will be considered as Not Ordinary Resident and consequently, his / her foreign source income (income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) will be not part of total income of such individual (see proviso to section 5(1) of the Act).
- Reader may also refer my full article on this issue: https://taxguru.in/income-tax/determination-residential-status-individual-amendments.html
Conclusion –The amendments made by the provisions of the section 6(1A) as discussed hereinabove are unintended. Therefore, we will witness the further suitable amendments in the section 6 of the Act.
Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor publisher or its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
About Author: The author, Manish Harchandani (founder of Harchandani & Associates) is practicing Chartered Accountant and mainly practice in Direct Tax, International Taxation, Transfer Pricing & FEMA related advisory, litigation & compliance matters. He can be reached at harchandanimanish@gmail.com and at www.linkedin.com/in/mnharchandani.
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