Tax Implication of Overstaying in India due to lock down

Do those who have been stranded due to lock down become tax resident due to overstay?

Under the tax laws, residents are required to pay tax on their global income whereas non residents have to pay tax on their Indian income only. Your residential status is determined on the basis of aggregate period of your stay in India. Due to lock down announced in March, 2020 all the  domestic and international flights were cancelled resulting  into forced stay for some of persons beyond what they had originally planned  to retain their non resident status. In order to mitigate the hardship which might cause, the government has granted some relief in such cases. Let us discuss the rules of resident ship and the nature of relief granted by the government in such exceptional cases.

Provision determining residential status based on stay in India

Physical presence is mainly considered for your residential status which can normally be determined after end of the financial year based on your aggregate stay in India during the year under question or periods prior to that year.  You would become a resident of India if you satisfy any of the two conditions. Let us understand this with an example for the year ended 31^st March 2020. The first condition is of physical stay during the year ended 31^st March 2020 of 182 days or more in aggregate in India. Alternatively you would still be treated as resident of India for the year ended 31^st March 2020 even if you were in India for an aggregate period of 60 days or more during the year ended 31^st March. 2020 provided you were also present in India for 365 days or more in aggregating during the four years period beginning on   1^st April 2016 and ending on 31^st March 2019.

However for the Indian citizen and persons of Indian origin, who have come to India on a visit, there is relaxation in respect of second condition and they will become resident only and only if their stay in India has been for 182 days or more in the year under question.  There are different rules for citizen of India leaving India for taking up an employment outside India or those leaving as crew member of an Indian ship but are not relevant here for our discussion.

There is one more category of “Ordinary but not ordinary resident”  (ONOR) under the tax laws. So once you satisfy any of the above two basic conditions, you would still qualify as a ONOR if you were a non resident for nine years out of ten years period ended on 31^st March 2020 or were not in India for more than 729 days during seven years ending on 31^st March 2020.

There have been some amendments in the tax laws for determining residential status of a person but are not discussed here as the same are applicable for the financial year beginning from 1^st April 2020 whereas we are discussing  the residential status for the year ended 31^st March 2020.

Tax Implications of one becoming a resident?

For a person who is treated as resident of India for tax purposes, his global income becomes taxable in India even if the same foreign income might have been taxed in other country. You may get the benefit of credit for taxes paid on such income or relief under double tax avoidance agreement. In contrast a non resident is required to pay tax only on the income which is either first time received in India or accrues from assets held in India or for services rendered in India. So just because you have been forced to stay in India for a few days more than what you had planned due to the lockdown and unavailability of international flights, you may be badly hurt if you are treated as resident of India resulting in your global income getting  taxed in India.

Relief announced by the government

There has been some confusion about residential status of some of the persons whose period of stay in India has crossed the critical threshold limit of relevant period for the period ended 31^st March 2020. In order to clear the doubt and grant relief to such marginal cases, the Central Board of Taxes has issued circular No. 11 on 8th May 2020 clarifying that any involuntary stay in India  caused due to unavailability of international  flights should not be taken into account while computing the days of physical stay of a person in India. Moreover any period of quarantine imposed on any individual in India between 1^st March 2020 and 31^st March 2020 shall also be excluded from the days during which the Individual was physically present in India. This circular applies for the financial year financial year ended  31^st March 2020 only and there is no clarification for the current financial year but is expected to be on the same line.

I am sure this discussion will help mitigate double whammy of having to stay from their country of resident and taxation of their income from home country of many persons.

The writer is a tax and investment expert and can be reached on jainbalwant@gmail.com