Residential Status of An Individual, Post Budget 2020

The Income-tax Act, 1961 (hereinafter referred to as “the Act”) provides for three categories of residential status in India – Resident, Not Ordinarily Resident and Non-Resident..

1. Definition

Section 2(42) defines “resident” as - “resident” means a person who is resident in India within the meaning of Section 6” and Section 2(30) defines “non-resident” as - “non-resident” means a person who is not a “resident”…..

Therefore, the term “Not Ordinarily Resident” has not been explicitly defined in the Act but can be derived from the definitions of other two terms. Basically, not ordinarily resident status is a transition phase when a person gets transferred from the status of “non-resident” to the status of “resident”. This has been provided under the Act so that the ambit of tax in India does not get increased all of a sudden for a non-resident.

2. Criteria (refer summarised chart also)

Section 6 of the Act lays different principles to determine the residential status for different categories of persons – individuals, Hindu Undivided Family, firm, or other association, company, and every other person. Here, we shall discuss provisions relating only to the determination of individual’s residential status.

3. Incomes taxable in India

As per Section 5 of the Act, following are the incomes which shall be taxable in India depending on the residential status of an individual:

^{^} included if it is derived from a business controlled in or a profession set up in India.

Analysis

Assessee’s perspective

1. Marginal relief for this amendment has been given by the Memorandum to Finance Bill, 2020. It states that there are cases in which individuals who are actually carrying out substantial economic activities from India manage their period of stay in India, so as to remain a non-resident in perpetuity and therefore not required to declare their global income in India.

It is entirely possible for an individual to arrange his affairs in such a manner that he is not liable to tax in any country during a year. This arrangement is majorly employed by high net worth individuals (HNWI) to avoid paying taxes to any country. The current rules governing tax residence makes 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.

2. Before the amendment by the Finance Act, 2020, an individual who is an Indian citizen or a person of Indian origin was virtually under the ambit of only 182 days criterion, i.e., if such individual lives outside India and comes to India only for the purpose of visit, then he could have stayed in India for any period less than 182 days and he would still be classified as non-resident and therefore, any of his income which accrues or arises outside India would remain outside the ambit of tax in India.

3. Now, after the amendment by the Finance Act, 2020, above criterion shall stand restricted only to such Indian citizens or persons of Indian origin who live outside India and come to India only for the purpose of visit and have income upto ₹ 15 lakhs from sources other than foreign sources.

4. For Indian citizens and persons of Indian origin whose income from sources other than foreign sources exceeds ₹ 15 lakhs, following shall be the criteria:

It is needless to mention here that if any individual is in India for 182 days or more, he shall automatically be treated as resident subject to other two conditions, fulfilling which he shall be classified as not ordinary resident.

5. In accordance with above analysis, it can be concluded, for persons mentioned in table above, that:

• (i) because of the amendment made through the Finance Act, 2020 the residential status can be raised only to the level of not ordinary resident and not to the level of resident.
• (ii) the ambit of taxation in India will get increased only to income derived from a business controlled in or a profession set up in India.
• (iii) the disclosure requirements under Schedule FA – for foreign assets and Schedule AL – for assets and liabilities (except for Indian assets) shall not apply, as instructions to file Income Tax Returns explicitly exempt / reduce the ambit of disclosure for not ordinary residents.
• (iv) the amended Act distinguishes between the Indian citizens who are not liable to tax anywhere in the world because of their residential status and those who are not liable to tax anywhere in the world because of any other criteria.
• (v) citizens of India, who come under the ambit of this amendment will need to decide the reason because of which they are not liable to tax in any other country and upon such determination, the criteria for determining their residential status in India can be ascertained.

Government’s perspective

India is the largest recipient of personal remittances in the world. India’s personal remittances receipts in 2019, in accordance with the World Bank’s data, stand over USD 83 billion. As per data from various other sources, including that from RBI, majority portion of this remittance is received from the Gulf Cooperation Council (GCC) countries (United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Oman).

Majority portion of these remittances is for the purpose of Family maintenance, followed by Deposits in banks, Others, and Investments (land property / equity shares).

There is a common perspective that after the amendment in residential status by Finance Act, 2020, India may lose a portion of personal remittances sent by number of Indian citizens or persons of Indian origin working abroad. This argument is made on the ground that majority of GCC countries including UAE, Qatar, Kuwait and Oman do not levy any tax on individual’s income because of which all Indian citizens or persons of Indian origin working in such countries will now come under the ambit of Indian Income-tax law and will have to pay taxes on their global income.

However, in accordance with analysis done above, it is clear that there is no provision inserted under the Act which makes Indian citizen or person of Indian origin residing and earning abroad as ‘resident’ for the purpose of levying tax on their foreign incomes in India. Residential status of Indian citizens having income exceeding ₹ 15 lakhs in India including income derived from a business controlled in or a profession set up in India, can only be raised to ‘not ordinary resident’ in India for the purpose of Indian Income-tax law and therefore, income which accrue or arise to such citizens outside India except income derived from a business controlled in or a profession set up in India shall not be taxable in India.

Further, disclosure requirements for such citizens and persons of Indian origin shall be limited. However, there will now be a reduction in number of days for which such citizens or persons of Indian origin can stay in India. Therefore, there is no reason because of which there may be a reduction in above remittances. However, business investments by such citizens and persons of Indian origin may see a slump because of increased taxability ambit on business incomes of such citizens and persons of Indian origin.

Issue in the drafting of amendment

Clause (1) of Section 6 of the Act states the criteria of 182 days and 365 days for any individual to be classified as resident.

For making amendment in the Act, the Finance Act has inserted clause (1A) after clause (1) in Section 6. Clause (1A) reads as under:

Now, clause (1A) clearly overrules clause (1). All the conditions, viz. individual shall be an Indian citizen, Indian sources income exceeds ₹ 15 lakhs and he shall not be liable to tax in any other country by reason of his domicile or residence, can virtually be satisfied by any Indian citizen i.e. even by those who permanently reside in India.

Further, newly inserted sub-clause (d) in clause (6) of Section 6 makes above persons as ‘not ordinary resident’ and therefore by virtue of clause (1A) read with clause (6) of Section 6 of the Act, any Indian citizen can be classified as ‘not ordinary resident’ and thereafter he is not required to pay tax on global income in India. Furthermore, the disclosure requirements will also get reduced.

The above interpretation can never be the intent of the amendment, therefore, clarification in this regard is awaited.

Summarised Chart for the Determination of Residential Status of an Individual under the Act

The comprehensive decision framework governing the determination of residential status post Budget 2020 is structured as follows: