Analysis of amendments to Section 6 – Residency provisions under the Income-tax Act, 1961 (‘the Act’)

Old Provisions Proposals made through Finance Bill 2020 (Change to Old Provisions highlighted in RED) Amendments made through Finance Act 2020 (Change to Old Provisions highlighted in RED)
 

I. Resident in India if :-

(a) Stays in India in previous year >= 182 days; (or)

(b) Stays in India in previous year >= 60 days & Stays in India in the 4 years preceding to the previous year for >= 365 days

In the clause (b) above, 60 days to be replaced with 182 days in case of the following:

Citizens of India:

  • Leaves India in any previous year as a member of the crew of an Indian ship
  • Leaves for the purposes of employment outside India

In the clause (b) above, 60 days to be replaced with 182 days in case of the following:

Citizens of India and POI:

  • being outside India, comes on a visit to India in any previous year

II. Non-Resident

In case the above conditions are not met, the individual would be considered as a Non-resident

III. Resident but Not Ordinary Resident (RNOR)

Once an individual qualifies as a resident in India, the second test is for identifying RNOR status of that individual which was in the erstwhile law was as under:

(a) Non-resident in 9 out of 10 preceding previous years; (or)

(b) Stayed in India in the 7 years preceding to the previous year for <= 729 days

Similar is the case with HUF where the above test is to be applied with the manager of the HUF

 

I. Resident in India if :-

(a) Stays in India in previous year >= 182 days; (or)

(b) Stays in India in previous year >= 60 days & Stays in India in the 4 years preceding to the previous year for >= 365 days

In the clause (b) above, 60 days to be replaced with 182 days in case of the following:

Citizens of India:

  • Leaves India in any previous year as a member of the crew of an Indian ship
  • Leaves for the purposes of employment outside India

In the clause (b) above, 60 days to be replaced with 182 days120 days in case of the following:

Citizens of India and POI:

  • being outside India, comes on a visit to India in any previous year

Additionally, after the clause (1) of section 6, the following clause (1A) was proposed:

(1A) 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.

II. Non-Resident

In case the above conditions are not met, the individual would be considered as a Non-resident

III. Resident but Not Ordinary Resident (RNOR)

Once an individual qualifies as a resident in India, the second test is for identifying RNOR status of that individual which was in the erstwhile law was as under:

(a) Non-resident in 9 out of 10 preceding previous years; (or)

(b) Stayed in India in the 7 years preceding to the previous year for <= 729 days

Similar is the case with HUF where the above test is to be applied with the manager of the HUF

I. Resident in India if :-

(a) Stays in India in previous year >= 182 days; (or)

(b) Stays in India in previous year >= 60 days & Stays in India in the 4 years preceding to the previous year for >= 365 days

In the clause (b) above, 60 days to be replaced with 182 days in case of the following:

Citizens of India:

Leaves India in any previous year as a member of the crew of an Indian ship

Leaves for the purposes of employment outside India

In the clause (b) above, 60 days to be replaced with 120 days in case of individuals where total income, other than income from foreign source, is more than INR 15 Lacs; and in any other case 182 days of the following:

Citizens of India and POI:

  • being outside India, comes on a visit to India in any previous year

Additionally, after the clause (1) of section 6, the following clause (1A) was proposed:

(1A) 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<<Deemed to be a resident in India>>

II. Non-Resident

In case the above conditions are not met, the individual would be considered as a Non-resident

III. Resident but Not Ordinary Resident (RNOR)

Once an individual qualifies as a resident in India, the second test is for identifying RNOR status of that individual which was in the erstwhile law was as under:

(a) Non-resident in 9 out of 10 preceding previous years; (or)

(b) Stayed in India in the 7 years preceding to the previous year for <= 729 days; (or)

(c) Stayed in India in the previous year >=120 days but <182 days and total income, other than foreign sourced income >15 Lacs; or

(d) Individual falling under (1A) as deemed to be resident in India

Similar is the case with HUF where the above test under (a) or (b) is to be applied with the manager of the HUF

Explanation: For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Implication of the Amendment in Income Chargeable to tax

In the comparison of the earlier regime and the new provisions, where the individual citizen of India or PIO (a) visits India for more than 120 days in the previous year and less than 182 days; or (b) where the citizen of India resides in any other country or territory and is not liable to tax by reason of his domicile or residence or any other criteria of similar nature; and in both cases satisfies the total income criteria (>15 lacs) in India, then he would be regarded as RNOR. Now one will have a question as to what difference would it make to taxability when this situation happens. The taxability position which would then happen has been tabled below, but first we would explain the taxability of RNOR explained under section 5 of the Income-tax Act, 1961:

Section 5 : Scope of total income

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; or

(b) accrues or arises or is deemed to accrue or arise to him in India; or

(c) accrues or arises to him outside India during such year :

It has been further explained that in the case of a RNOR in India within the meaning 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. [Emphasis Supplied]

Therefore, the same has been explained in table below:

Income Residential Status & Taxbility in India
ROR RNOR NR
Received or deemed to be received in India Yes Yes Yes
Accrues or arises or deemed to accrue or arises in India Yes Yes Yes
Accrues or arises outside India from:-

a. Business controlled in India or profession set up in India

b. Any other income

Yes

Yes

Yes

No

No

No

Disclosure of Foreign assets in the Income tax return in India Yes No No

Conclusion

There have been instances of tax abuse in past where the individual has been having economic and business interest in India and he/she had been hopping around the world to get the benefit of tax laws of other nations by virtue of his/her residency and hence this amendment. It is important to note that since he/she would be classified as a resident under such a scenario and if that individual is also a tax resident of another jurisdiction, then reference to tie breaker test would be required for taking relief under the tax treaty. Further, if an individual is controlling or managing an overseas company whilst being an RNOR, then such company may also be deemed to be tax resident of India under the ‘place of effective management’ rules.

Therefore, due to the changes in the above provisions, the India citizen or POI, who is planning to visit India, will have to consider the above amendments so that he can plan his visit days accordingly if he/ she is having an impact due to this change in residential status. However, where he/ she does not have income from a business controlled in or a profession set up in India or where there can be no impact of POEM rules, in that case, this amendment should not have an impact. Further, similar would apply to an individual who resides in other country or territory where he/she is not liable to tax and satisfies the income condition in India.

It is interesting to learn that the income criteria mentions that income, other than income from foreign sources, is more than 15 Lacs. This implies that the individual will have an onus to justify that the income which he/she is excluding from the calculation of the said limit of 15 Lacs is a foreign sourced income which has been defined as

  • Income which accrues or arises outside India – Where the individual would fail to justify that the income has accrued outside India, it may be considered as an income accruing in India; and
  • This would exclude the income which is derived from a business controlled in or profession set up in India

Till now there were no level of checks required in ITR for understanding the bifurcation between foreign sourced income and Indian sourced income, however since the criteria of INR 15 lacs has been placed for the purpose of drawing a line to identify the residential status, probably the Income-tax in its ITR form may include the requirement of checks to justify that such individual does not have income in India of more than INR 15Lacs.

Instances (as example) where the difficulties may be faced in the above scenario are:

i. In case where the person has income due to digital services in foreign land which is tax free jurisdiction, that individual has to justify that such source of income is from a foreign land and he staying there would not independently suffice

ii. He will also have to justify that such income which is being accrued or received by him outside India are not from act of control being exercised from India or any set up in India

Disclaimer: The analysis done and the views expressed in this article are our personal views and this should in no way construed as an opinion. This article has been used for public reading and knowledge sharing purpose and is not meant to address any particular query. In case of any clarifications or before taking any decision, the reader is requested to take a professional’s opinion or advice independently.

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2 Comments

  1. Ajax says:

    1. What includes “business or a profession set-up in India”? I am referring to Section 5 : Scope of total income.

    2. Can you also give an example of RNOR income which does NOT accrue or arise outside India as a result of a business or profession set up in India?
    This appears to be so vague and subject to interpretation.
    (c) accrues or arises to him outside India during such year :

    It has been further explained that in the case of a RNOR in India within the meaning 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.

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