Like most other countries, India also considers the number of days spent by the individual in India to determine the tax residency status of the individual in India and it determines the taxability.
The Union Budget 2020 proposed certain anti-abuse measures for taxpayers who arranged their stay in India with an intent to reduce their tax liability in India on income earned overseas. However, given the strong reservations among the Indian diaspora about the proposed amendments, the government has diluted the provisions relating to determination of residential status to some extent while enacting the Finance Act, 2020.
Erstwhile provisions under the Income-tax Act, 19
The residential status of an individual is basically divided into two categories:
1. Resident – Under the Act, an individual is regarded as resident in India, if he satisfies either of the following tests:
a) He is present in India for 182 days or more in the relevant financial year (i.e. 1 April to 31 March); or
b) He is present in India for 60 days or more during the relevant financial year, and has spent at least 365 days in India during the preceding 4 years.
However, if a citizen of India leaves India for the purposes of employment outside India, or an Indian citizen or person of Indian origin (‘PIO’) who being outside India comes to India on a visit, the 60-day test stands extended to 182 days.
Once the test of residency is satisfied, an individual would be treated as ‘Resident but not ordinarily resident’ (‘RNOR’) in India, if any of the following two conditions are satisfied:
(i) If an individual has been non-resident (‘NR’) in India in 9 out of the 10 preceding financial years; or
(ii) If an individual has during the 7 preceding financial years been in India for an aggregate period of 729 days or less.
If both the above conditions are not satisfied, a resident would qualify as ‘resident and ordinarily resident’ (‘ROR’).
2. Non Resident- A person who is not a ‘resident’ in India as indicated above, will be an Non Resident.
Amendments proposed by Finance Bill, 2020
The Finance Bill, 2020 had proposed the following amendments to the aforesaid tax rules:
It proposed to reduce the time limit from 182 days to 120 days.
Deemed residency test:
The Finance Bill, 2020 also proposed a new concept of deemed residency. As per the said proposed amendment, an Indian citizen was deemed to be resident in India in case he was not liable to tax in any other country or territory by reason of domicile or residence or any other criteria of similar nature.
This was a deviation from the general rule of determination of residential status based on the number of days present in India, which caused anxiety amongst genuine NR Indian citizens who had to travel across the globe for business, or were based in countries that did not levy tax on individuals.
This amendment was aimed to bring into the tax net, Indian citizens managing their stay in such a manner that they didn’t qualify to be tax resident of any country and accordingly had minimal or nil tax liability in India and the rest of the world.
However, as mentioned earlier this led to concerns amongst Indian citizens who were employed overseas (particularly those in the Middle East, where there is no personal income tax). Also, certain terms such as ‘liable to tax’ are not defined under the Act. While there have been certain judicial precedents where the term ‘liable to tax’ has been interpreted to not mean payment of actual taxes, in the absence of the definition, the same may lead to different interpretations.
Seeking to placate such concerns, the Central Board of Direct Taxes (‘CBDT’) issued a press release on 2 February 2020. The press release explicitly stated that the new deeming provision was not intended to include in tax net those Indian citizens who are bona fide workers in other countries. It further clarified that in case of an Indian citizen who became deemed resident of India under this proposed provision, income earned outside India by him shall not be taxable in India only when it is generated from an Indian business or profession.
Further, as per the said press release, necessary clarification, if required, was to be incorporated in the relevant provision of the law.
Resident But Not Ordinary Resident:
The said clause was proposed to be substituted to provide that an individual shall be considered as RNOR, in case he has been an NR in India in 7 out of 10 preceding financial years.
Changes as per Finance Act, 2020
The Finance Act, 2020 has made the following changes to the Budget proposals:
Residency rule for individuals visiting India:
The Income Tax Act has now been amended to provide that the new time limit of 120 days shall be applicable only in case of an Indian citizen or PIO having taxable income, other than the income from foreign sources, exceeding INR 15 lakh during the relevant financial year.
Deemed residency test:
While the deemed residency provisions were not withdrawn, the same have been diluted to provide that they would be applicable only in case of Indian citizens having taxable income, other than the income from foreign sources, exceeding INR 15 lakh during the relevant financial year.
For the purposes of both the above amendments (residency rule for individuals visiting India and deemed residency test):
• An individual would qualify to be RNOR – accordingly, only the India sourced income and income derived from a business controlled in or a profession set up in India would be taxable in India for such individuals.
In light of the above, it becomes imperative for Indian citizens or PIOs working overseas to estimate their income from Indian sources to understand the tax implications in India. Further, the Indian withholding tax obligations, if any, in the hands of the foreign employer may also need to be analysed.
Resident But Not Ordinary Resident:
The Finance Act, 2020 has ultimately retained the conditions that were currently applicable in case of a resident individual for determination whether such an individual qualifies to be RNOR. In other words, there is no change in the RNOR rules vis-à-vis earlier years.
It may be prudent for individuals to analyse the impact of the aforesaid amendments on their tax position in India and evaluate benefits, if any, available under the Double Taxation Avoidance Agreements entered into by India. Moreover, the term ‘liable to tax’ needs to be analysed in light of judicial pronouncements, and the CBDT press release of 2 February 2020 needs to be considered, for determination of exposure for Indians working in the Middle East.