Seafarers – No Need To Pay Tax Even If You Have Not Completed NRI Days For Fy 2020-21

As we all know that FY 2020-21 has been a roller coaster ride for everyone due to COVID 19 pandemic, crew change during these tough times was a challenge due to international flight restrictions. As a result, many Indian Seafarers were not able to complete NRI days i.e., 184 days outside India during the FY 2020-21. This has resulted in a change in the residential status of many Seafarers for FY 2020-21.

We will highlight the provisions of the Income Tax Act which undoubtedly display the conditions where the Seafarers will not be liable to pay tax even if they have not sailed for more than 184 days outside India during the FY 2020-21.

Let us discuss residential status under Income Tax Act and its corresponding tax implications for better understanding.

There are two types of Residential Status under the Income Tax Act:

1) Resident Indian

2) Non-Resident Indian (NRI)

If a seafarer stays in India for more than 182 days in a financial year i.e., if the seafarer is not able to sail for more than 184 days outside India in a financial year, then the seafarer’s residential status will be classified as Resident Indian.

Further, there are two subcategories for classification, once a seafarer is primarily classified as a Resident Indian. This subcategory will help to determine whether the income earned from sailing in foreign ships outside India will be taxable or not in the FY 2020-21.

1) Resident & Ordinary Resident (ROR)

2) Resident & Non-Ordinary Resident (RNOR)

Conditions for becoming Resident & Ordinary Resident (ROR):

A seafarer shall be classified as ROR for the FY 2020-21 if the following conditions are satisfied:

1. A Seafarer stays in India for more than 182 days in a FY AND

2(a). A Seafarer is a Resident Indian in at least 2 FY’s out of preceding 10 FY’s OR

2(b). A Seafarer stays in India for more than 729 days in preceding 7 FY’s

If a Seafarer is ‘Resident & Ordinary Resident’ (ROR) for FY 2020-21, then all the income earned, whether in India or outside India will be taxable in India. Hence, in case of a seafarer whose residential status is ROR for the FY 2020-21, the income from sailing in foreign ships will also be taxable in India. Thus, seafarer whose residential status is ROR for the FY 2020-21 must compulsorily file their Income Tax Return (ITR) and pay the tax on the entire income earned whether from sailing or other income by 31st of July, 2021, unless the date is extended by Central Board of Direct Taxes (CBDT). Non filing of ITR and non-payment of tax shall attract huge penalty and interest as per the provisions of the Income Tax Act, 1961.

Conditions for becoming Resident & Non-Ordinary Resident (RNOR):

A seafarer shall be classified as RNOR for the FY 2020-21 if the following conditions are satisfied:

1. A seafarer stays in India for more than 182 days in a FY AND

2(a). A Seafarer is a Non-Resident Indian (NRI) in any 9 FY’s out of preceding 10 FY’s OR

2(b). A Seafarer stays in India for less than or equal to 729 days in preceding 10 FY’s

If a seafarer is “Resident & Non-Ordinary Resident” (RNOR) for FY 2020-21, then income earned outside India is not taxable in India. However, income earned from outside India is taxable if the business from which the income is earned is controlled from India.

Once seafarers are classified as RNOR for the FY 2020-21, they can undoubtedly take this advantage wherein they will not be required to pay any tax on income earned from sailing in foreign ships, even if they are staying in India for more than 182 days i.e., they have not been able to sail outside India for more than 184 days in the FY 2020-21.

Non-Resident Indian (NRI):

Seafarers who stay in India for less than 182 days i.e., they sail outside India for 184 days or more, will be classified as a Non-Resident Indian (NRI) for the FY 2020-21.

Being a Non-resident Indian, income earned outside India is not taxable in India. Seafarer’s foreign income i.e., income from services provided on foreign ship will not be taxable in India. However, as per CBDT circular (April 2017), he/she need to receive their income in Non-Resident External (NRE) account.

No Tax Impact on Seafarers with respect to Budget 2020 – Rule of 120 Days Stay in India:

Seafarers are Resident Indian if they stay in India for 182 days or more as explained above. They plan their sailing in such a way that they sail in foreign waters for more than 184 days. Therefore, they spend time in India only for 3 to 5 months which is less than 182 days. Normally, they stay in India for more than 120 days.

Budget 2020 has introduced provisions in relation to Residential Status. It states that a person shall be considered as resident in India if the stay in India is for 120 days or more. Hence, if this new residency rule is applicable to seafarers, it can be a huge tax burden on the seafarers. But there is a twist in the new residency rule. This rule of 120 days is applicable if the taxable income of the seafarer in India exceeds Rs. 15 lakhs. Generally, taxable income in India of most of the seafarers do not exceed Rs. 15 lakhs. Therefore, the new rule of 120 days shall not be applicable to seafarers.

Even if a seafarer stays in India for more than 120 days and his taxable income from India exceeds Rs.15 lakhs, the residential status of the seafarer will be Resident & Non-Ordinary Resident (RNOR) for the FY 2020-21. Thus, the seafarer will not be required to pay any tax in India on the income earned from sailing in foreign ship.

Conclusion:

Even if a seafarer is not able to complete 184 days outside India in FY 2020-21, but is a Non-Resident Indian (NRI) in any 9 FY’s out of the preceding 10 FY’s, or the stay in India is less than 729 days in preceding 7 FY’s, then the income earned from sailing in foreign ships shall not be taxable in India by claiming the advantage of “Resident & Non-Ordinary Resident” (RNOR) status in FY 2020-21.

Therefore, by claiming RNOR status, the seafarers will not be liable to pay taxes on the income earned from sailing in foreign ship for the FY 2020-21.