FEBRUARY 06, 2020

By Samir Parekh, Avani Shetty and Richa Kumari

THE incidence of tax and the determination of taxable income in India under the domestic income tax law depends on the tax residential status of the taxpayer.

The Union Budget 2020 presented on 1 February 2020 before the Lower House of Parliament by the Hon'ble Finance Minister has proposed significant changes to the tax residency rules for individual taxpayers. The proposal once accepted would have a substantial impact on individual taxation and on NRIs in particular.

Existing residency rules

The existing rules are primarily based on the number of days of stay in India in the current year and preceding tax years.

A tax residency of an individual taxpayer can be one of the following:

- Resident and Ordinarily Resident (ROR),

- Resident but Not Ordinarily Resident (RNOR) or

- Non-Resident (NR).

The conditions to be satisfied to qualify in any of these categories are discussed below:

1. Basic test for triggering tax residency in India:-

An individual is regarded as a resident in India for a relevant tax year, if he/she is present in India for:

a) 182 days or more during that year; or

b) 60 days* or more during that year and 365 days or more during the preceding 4 years.

*The 60 days condition is enhanced to 182 days in the following cases:

1. Citizen of India or person of Indian origin who being outside India comes for a visit in India; and

2. An Indian citizen leaves India for the purpose of employment abroad or as a member of an Indian crew.

Citizenship is governed by the Citizenship Act, 1955, as amended by the Citizenship (Amendment) Act, 2019. If the above stay test is not satisfied, then the individual taxpayer qualifies as Non-Resident of India.

2. Determining ordinary tax residency in India:-

Once the basic test is examined, an individual taxpayer would qualify as a ordinarily resident of India if both the following conditions are satisfied:

- He has been resident in India for at least 2 out of 10 preceding tax years; and

- He has been present in India for a period aggregating to 730 days or more during the 7 preceding tax years. A resident individual who does not satisfy any one or both of the additional conditions would be regarded as RNOR.

Budget proposals

The following changes have been proposed to the above residency test:

Changes in basic test

1. The relaxation of 182 days of presence in India during a relevant tax year in place of 60 days given to an Indian citizen or person of Indian origin visiting India, has been retained. However, the requirement of 182 days has been reduced to 120 days.

Change in conditions for determining not ordinary residency

2. It is proposed to amend the condition to provide that an individual would qualify as "not ordinarily resident" in India, if he/she has been a non-resident in India in 7 out of 10 tax years preceding that tax year.

Accordingly, the current conditions of being non-resident status in 9 out of 10 previous years or less than 729 days in preceding 7 tax year to qualify as RNOR is proposed to be abolished.

Deeming residency test introduced

3. This is a significant deviation from the existing test which is primarily based on number of days of presence in India.

The deeming provision would empower India to consider its citizen as resident of India for income tax purposes, irrespective of their number of days of stay in India, if they are not liable to tax on their income in any other country or territory by reason of domicile or residence or any other criteria of similar nature.

It appears to be an anti-abuse measure to curtail double non-taxation, in continuation of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

Implications

The above well-intended measures would however bring into its ambit genuine Indian citizens who have elected relocation to foreign jurisdictions for better prospects. As regards the deeming tax residency provision, there may however be practical concerns that may arise, such as:-

i. Applicability to Overseas Citizens of India

ii. Applicability to jurisdiction following calendar year as basis of taxation as against the financial year in India. India currently does not recognise split residency rule under its domestic tax law.

iii. Interpretation of the term "liable to tax" - Whether suo-moto exemption granted by foreign country may be considered as not liable to tax? Would the residency be applied income wise if the income earned outside India from an Indian business or profession income is not liable to tax in another country?

The term "liable to tax" in absence of any codified definition is subject to interpretation. There already have been signification litigation on the said term "liable to tax" as provided under the Double Taxation Avoidance Agreement (DTAA) between India and UAE. Judicial authorities have held that "liable to tax" does not imply that it should have actually been paid. The said debate however was solely on the applicability of the DTAA. The use of the said term to determine tax residency is quite wider in application and thus, higher possibility of litigation.

The Memorandum explaining the Finance Bill, 2020 provisions indicates that the said amendment seeks to tackle the issue of stateless persons. The said clarification further adds to the confusion as the term "stateless" is also unclear.

iv. Implications on payer of income as regards deduction of tax at source.

v. Applicability of the deeming residency for domestic tax law purposes as well as claiming benefits under the DTAA.

Press release

The Central Board of Direct Taxes (CBDT) has vide a Press Release issued on 2 February 2020, clarified that the deeming provisions are intended to bring into the tax ambit the income earned outside India from an Indian business or profession only. Thus, the said proposal may not have any implications on Indians who are bona fide workers in other countries, including in the Middle East.

Further, the Press Release also indicates that necessary clarification will be codified in the legislation. While the clarification is welcomed, certainty in the matter shall be achieved only once the legislation in the matter has been introduced.

Concluding remarks

The domestic tax law framework is proposed to be strengthened vis-à-vis taxing its citizens as well as any other individual who has significant activities present within India. Taxpayers, including NRIs, will need to analyse the implications of the changes on their India tax obligations from 1 April 2020 onwards.

The proposal is, however, likely to create anxiety among the NRI community and it would be thus a good governance exercise to allay the apprehension in respect of the same, in particular for deemed residency, before the amendment in law is brought in to force.

[Samir Parekh is Director, Avani Shetty is Manager and Richa Kumari is Assistant Manager with Deloitte Haskins and Sells LLP. The views expressed are strictly personal.]