Zainab Bookwala & Risha Gandhi
Globalization has led to the growing mobility of labour force across borders. While Indians typically started migrating outside India for employment opportunities due to lack of similar opportunities in India, the recent India growth story has Indians being sent abroad as a part of the Indian multinational expansion footprint.
Migration out of India for employment brings with it a lot of issues such as cultural changes, difference in the outlook of people, higher standard of living, difference in the laws of the country, higher cost of living, etc. While it is important to handle all such issues, an individual migrating outside India must also bear in mind tax implications in relation to his migration and return..
The income of an individual is taxed based on his residential status in India. The residential status, in turn, is determined based on the physical presence of an individual in India in the relevant financial year as well as preceding ten financial years. The tax resident of India is subject to tax on his/her global income.
The residential status in India is determined as per Section 6 of the Income-tax Act, 1961 in the following manner:
a) the stay of the individual in India in a particular year is for a period or periods amounting in all to 182 days or more; or
b) the individual is present in India for a period of 60 days or more during the relevant tax year and at least 365 days or more during the four preceding tax years.
However, as per the first limb of Explanation to section 6(1), in case an individual being a citizen of India, leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India, the number of days reckoned for the presence in India for the purpose of determining his/her residential status would be for a period of 182 days or more in the relevant financial year instead of 60 days as per point (b) above.
Further, the second limb of the Explanation provides that in case an Indian citizen or person of Indian origin who is outside India, comes to visit India in any previous year, the number of days presence of an individual in India for determining his/her residential status would be 182 days in the relevant financial year instead of 60 days as per point (b) above.
In the context of the residential status of a person employed outside India, the Authority for Advance Ruling (AAR) has recently pronounced a decision in the case of Smita Anand (A.A.R. No.1091 of 2011 Dated 19.02.2014) which provides important learnings for employees wanting to settle back in India.
In the said case, an individual, an Indian citizen migrated out of India for the purpose of employment abroadduring middle of2007. During employment outside India, the individualvisited India on various occasions. However, the individual’sstay in India in each of the years never exceeded 182 days. The individualresigned from employment outside India and came to India towards the end of financial year 2010-11, the total stay in India during financial year 2010-11 being119 days.During the aforesaid financial year, the individual realized proceeds from exercise of ESOPs and RSUs granted by the individual’semployer abroad. Such proceeds were credited in the individual’sbank account outside India in US Dollars which was subsequently, remitted to the individual’sIndian savings bank account before the individual’s cameto India.
While ruling of the AAR was sought on whether a non-resident would be taxable in India in respect of the proceeds on exercise of RSUs and ESOPs received outside India and subsequently, remitted to India, the moot point which was required to be evaluated by the Authority was regarding the residential status of the individual during financial year 2010-11. It was obvious that the taxability of the proceeds of ESOP and RSU would depend on the residential status of the individual during FY 2010-11.
For determining the residential status, the applicant had to be evaluated based on the aforesaid two conditions regarding the period of stay in India. Regarding the first limb of the Explanation to section 6(1), the Authority held that the same would be applicable only in the year when the person leaves for employment outside India and not in the subsequent years. Accordingly, the AARheld that first limb of the Explanation would not apply to FY 2010-11.
As regards the applicability of second limb of the Explanation to section 9(1), the individual contended that the purposeof coming to India was merely a visit and placed certain information in support of the contention.
The AAR was of the view that the aforesaid arguments of the applicant were not sufficient to conclude that the individual came to India merely on a visit. Further, the applicant could not provide any evidence on whether the individual had left India subsequently, for employment.
Therefore, based on the facts placed before it the AAR held that the second limb of Explanation to section 6(1) would also not be applicable in the case of the applicant. Accordingly, as the applicant was present in India for a period of 119 days i.e. more than 60 days in FY 2010-11 and also, during the past 4 years, her cumulative stay was more than 365 days, the individual was considered as a resident Indian and consequentially, the proceeds received on exercise of RSU and ESOP from employer outside India were held to be taxable in India. The AAR however noted that if the person is able to provide satisfactory evidence of future employment outside India, he would be considered as a non-resident.
Though the AAR has decided the issue based on the facts before it, the same would certainly need to be noted by employees wanting to switch employments or come back to India.
(The authors Zainab Bookwala (Deputy Manager) & Risha Gandhi (Assistant Manager) are from Deloitte Haskins & Sells. Views expressed above are personal and not that of the firm.)