CA Nitin Shetty, Mangaluru

Mangaluru, Feb 4: After the amendments in Budget 2020 and clarificatory/confusing post budget press meet by the Finance Ministry, Non-Resident Indian Citizens are now worried about their liability to income tax in India on their global income. It has to be noted that, there has been two changes (one amendment and the other being insertion of a new clause) in Section 6 of The Income Tax Act which provides for residential status, which will affect the residential status of an Individual.

CA Nitin Shetty

Before going through the amendments, it is very much important for one to understand the existing provisions in respect of residential status of an Individual. Under the existing provision, there are two primary conditions and if an Individual satisfies any one of the said conditions, then he will be regarded as resident in India. Sub section 1 of Section 6 of the Act before the amendment made by Finance Act 2020 reads as follows

(1) An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to 182 days or more ; or

(b) is in India for a period of not less than 365 days in four preceding previous years and his period of stay in India should not have been less than 60 days in the previous year of the relevant assessment year.

[Explanation. 1]—In the case of an individual,— (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted ;

(c) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted.

As per the current tax laws, Liberalized provisions apply for certain categories, as below:

A person

(i) who is an Indian citizen and who leaves India during the previous year for the purpose of employment or

(ii) an Indian citizen who leaves India as a member of the crew of an Indian ship or

(iii) an Indian citizen or a Person of Indian Origin who comes to India on a visit during the previous year

who has spent 365 days or more in India in the four immediately preceding previous years will not lose his ‘Non-Resident’ status, unless his stay in India is 182 days or more during the previous year.

The Finance Bill 2020 has reduced this threshold to 120 days for an Indian citizen or a Person of Indian Origin who comes to India on a visit during the previous year. Therefore, Indian citizens/Person of Indian Origin visiting India for long stay for any purpose would need to carefully evaluate their residential status, else they may stand to qualify as a resident in India

• if he stays in India for a period of 182 days or more in the previous year, or
• if he stays in India for 120 days or more in the previous year and 365 days or more in the four years immediately preceding previous year.

*A person shall be deemed to be of Indian origin if he or either of his parents or any of his grandparents was born in India or undivided India.

Following examples will give a better understanding of the proposed amendment.

Example 1:

An Indian Citizen or person of Indian origin comes to India on a visit and stays in India for 185 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous years (i.e 2019-20, 2018-19, 2017-18, 2016-17)

Under this scenario, he will be considered as Resident in India as he has stayed in India for 182 days or more during the previous year, irrespective of his number of days stayed in India during the four immediately preceding previous years.

Example 2:

An Indian Citizen or person of Indian origin comes to India on a visit and stays in India for 150 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous year (i.e 2019-20, 2018-19, 2017-18, 2016-17).

Under this scenario, he will be considered as Resident in India as he has stayed in India for 120 days or more during the previous year and he has stayed in India for a total period of 365 days or more during the four immediately preceding previous years.

Example 3:

An Indian Citizen or person of Indian origin comes to India on a visit and stays in India for 150 days during the previous year 2020-21. He has stayed in India for a total period of 320 days during the four immediately preceding previous years (i.e 2019-20, 2018-19, 2017-18, 2016-17).

Under this scenario, he will be considered as Non-Resident in India as he has stayed in India for less than 365 days during the four years, immediately preceding previous year, inspite of the fact that he has stayed in India for 120 days or more during the previous year.

Example 4:

An Indian Citizen or person of Indian origin comes to India on a visit and stays in India for 100 days during the previous year 2020-21. He has stayed in India for a total period of 450 days during the four immediately preceding previous years (i.e 2019-20, 2018-19, 2017-18, 2016-17).

Under this scenario, he will be considered as Non-Resident in India as he has stayed in India for less than 120 days during the previous year, inspite of the fact that he has stayed in India for 365 days or more during the four immediately preceding previous years.

Example 5:

An Indian Citizen or person of Indian origin comes to India on a visit and stays in India for 100 days during the previous year 2020-21. He has stayed in India for a total period of 320 days during the four immediately preceding previous years (i.e 2019-20, 2018-19, 2017-18, 2016-17).

Under this scenario, he will be considered as Non-Resident in India as he has stayed in India for less than 120 days during the previous year.

The law has made it clear that the above amendment by Finance Act 2020, is applicable only for those Indian Citizens or person of Indian origin who come to India on a visit and it will not be applicable to those Indian citizens who are leaving India for the first time for the purpose of employment outside India or an Indian citizen who leaves India as a member of the crew of an Indian ship. It is always important to understand that it is the number of days of stay in India is what matters in order to determine one’s residential status in India. Hence it is not important to calculate the number of days of stay outside India as it might give incorrect result in determination of one’s residential status in India.

RESIDENT BUT NOT ORDINARILY RESIDENT:

A resident is further categorized as 'ordinary resident' and 'not-ordinarily resident' and the tax liability in India differs for both categories. Broadly, an ordinary resident is taxable in India on his global income whereas a 'not-ordinarily resident' is not taxable in India for income that arises outside India. Sub-section 6 of Section 6 of Income Tax Act 1961 before the amendment made by Finance Act 2020 reads as follows

A person is said to be "not ordinarily resident" in India in any previous year if an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

The Finance Bill 2020 has amended the criteria for qualifying as a 'not-ordinarily resident' in India. A person would now qualify as a 'not-ordinarily resident' if he has been a non-resident in India in 7 out of the 10 previous years preceding that year (erstwhile conditions included being non-resident for 9 out 10 preceding tax years or stay in India less being than 729 days in preceding 7 tax years). This amendment would directly impact and necessitate evaluating the residential status of expatriates working in India or Indians moving outside India.

DEEMED RESIDENT:

Now let us have a look at the provisions of newly inserted clause 1A under section 6 of the Income Tax Act, which provides for a non-resident Indian citizen to be a deemed resident in India. The new clause reads as follows

“(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.”

On a plain reading of the above clause, one can interpret that, even though an Indian citizen is non-resident in India as per clause 1, if he is not liable to tax in any other country as a ‘tax resident’ of such other country, then he will be deemed to be a resident in India. Once he is a resident in India either as per clause 1 or clause 1A, his global income will attract tax in India. Hence, it is very important to understand for any person, when he will be attracted/covered by the newly inserted clause 1A to section 6 of Income Tax Act, 1961.

Before interpreting any amendment, it is important for one to find an answer as to what induced the Government to make this amendment. Hence, we will now have a look at the intention of the government in introducing the said clause.

The Finance Minister during her budget speech has not mentioned anything about the said amendment. However, in the last sentence of para 6.6 to ‘Annex to Part B of Budget Speech’, it has been stated that

‘It is also proposed to provide that an Indian citizen who is not liable to tax anywhere would be deemed to be resident in India.’

Further, as per Memorandum explaining the budgetary amendments under the head ‘PREVENTING TAX ABUSE’ explaining insertion of the said clause, it has been stated that

‘The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.’

From the above explanations, it is clear that the above provision is an anti-abusive provision. Further, the aim of the said provision is to prevent an income earned, from not being taxed in any country due to the sole fact that the individual is not a tax resident of any country/jurisdiction in the world for a financial period. It means that if a person is stateless for tax purposes, then his global income will not get taxed/ his income will be escaping taxes and it will result in non-taxation of his income as he is a non-resident in all the countries in the world. In other words, if a non-resident Indian citizen is not a tax resident, in any country in a financial year/period, as per the law prevailing in such country/countries, then he will be a deemed resident in India for that financial year.

If a person is a tax resident in atleast one of the countries, then, the newly inserted provision in clause 1A to section 6 will not be applicable to such non-resident Indian citizen.

For Ex: An Indian citizen is employed in Dubai and as per clause of section 6 he is non-resident in India. In Dubai, there is no tax on personal income. The question comes to our mind, whether such a person is covered by the newly inserted clause 1A of section 6? Whether income of such person earned in Dubai due to his employment therein, will attract tax in India?

– The answer will be NO.

It is clear that the said non-resident Indian citizen is a tax resident of Dubai (UAE) though he is not having any tax on individual income in Dubai.

One can have a better understanding of the said newly inserted provisions of section 1A to section 6 with the following chart.

Further, the Ministry of Finance has issued a Press Release dt. 02.02.2020, in which they tried to clarify the newly inserted provisions of section 6(1) - deemed residential status. The extract of the said Press Release is shown below

“The Finance Bill, 2020 has proposed that an Indian citizen shall be deemed to be resident in India, if he is not liable to be taxed in any country or jurisdiction. This is an anti-abuse provision since it is noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India.

The new provision is not intended to include in tax net those Indian citizens who are bonafide workers in other countries. In some section of the media the new provision is being interpreted to create an impression that those Indians who are bonafide workers in other countries, including in Middle East, and who are not liable to tax in these countries will be taxed in India on the income that they have earned there. This interpretation is not correct.

In order to avoid any misinterpretation, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Necessary clarification, if required, shall be incorporated in the relevant provision of the law.”

The first two para of the said press release is in line with the intention of the law at the time of drafting and introduction of the above provision. It states that it is an anti-abusive provision and not intended to tax bonafide workers working and earning income outside India. However, in the third para, it stated that the intention is to bring to tax income derived from an Indian business or profession. It has to be noted that, even without the proposed insertion of deemed residential clause, it was always a case that income accrued outside India from a business or profession set-up in India, was taxable in India. To tax the said income, there is no requirement for insertion of clause 1A to section 6 of deemed to be resident. The Section 5 – scope of income and section 9 – income deemed to accrue or arise in India under The Income Tax Act, 1961 had always covered within its ambit for taxation of the income which is derived from an Indian business or profession.

However, it has to be noted that, now what we have is only a Finance Bill, 2020. The newly proposed clauses will be embedded in the respective Acts/laws only after it gets Presidential assent. Hence, we can expect further modification of wordings in the proposal/clarification to the effect of the proposal.

To conclude, as it stands now, it can be safely inferred that, as the newly inserted clause 1A under section 6 is an anti-abusive provision and it is intended to target stateless persons, the same will be attracted to a non-resident Indian citizen who is not liable to tax in any country in the world for a particular financial period for a sole reason that he is not a tax resident of a country. Hence, section 6(1A) will not be attracted to a person, if a non-resident Indian citizen is a tax resident of any other county in the world for that particular year/period. It is also advisable for an Indian non-resident citizen to have proper documentation such as tax residency permit in a country outside India and/or tax residency certificate issued by competent authority outside India for every financial year in which he is a NRI.

Watch Budget 2020 panel discussion headed by CA Nitin Shetty: