The Modified Scope of “Residence in India” – An Analysis

1. Background:

1.1. Hon’ble Finance Minister of India – Ms. Nirmala Sitharaman, presented the Union Budget 2020-21 on 1 February 2020 and thereby introduced the Finance Bill 2020 bringing in some new provisions and amending some exiting provisions concerning cross border taxation, commonly referred to as ‘International Taxation’.

1.2. Among others, one such deliberation was an amendment to already existing and the most important scoping section i.e. Section 6 of the Act dealing with the Residential Status of the individual.

1.3. The relevant extract of Section 6 of the Act, as it stands today, is reproduced below:

1.4. Further, the relevant extract of the explanatory memorandum in this respect is reproduced below:

1.5. Simply stated, the above amendments infer as under:

• (i) Citizen of India (“Citizen”) not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature and having total income (other than income from foreign sources) exceeding fifteen lakh rupees during the previous year shall be deemed as “Resident” in India
• (ii) There shall be reduction in the ‘period of stay in India’ benefit from one hundred and eighty-two (182) days to one hundred and twenty (120) days for Citizen or Person of Indian Origin (“PIO”) and having total income (other than income from foreign sources) exceeding fifteen lakh rupees during the previous year to qualify as “Resident”
• (iii) The person qualifying as “Resident” as per above (i) or (ii) shall be “Resident but Not Ordinarily Resident” in India

1.6. Further, the phrase “income from foreign sources”, only for the purpose of section 6, has been defined as income which accrues or arises outside India except income derived from a business controlled in or a profession set up in India.

Now with the above background, the important implications in the context of Indian Expat (being lawful citizen of India) working and earning income in UAE and certain open issues are discussed as under:

2. Would Indian Expat be liable to pay income-tax in India on income earned in UAE?

2.1. The amendment deems the citizens as “Resident” in India in cases where 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 and having total income (other than income from foreign sources) exceeding fifteen lakh rupees during the previous year.

2.2. The above created huge apprehensions among the Indian Expat working and earning income in UAE as UAE does not levy any personal income tax and as a consequence of being labelled as “Resident” for the purpose of the Act, he would be liable to pay income-tax on his world income, particularly income earned in UAE.

2.3. In layman’s language, the plain reading of the text does interpret to mean that in case where person is not legally bound to pay tax in other country or jurisdiction, he would qualify as “Resident” in India and thus, so would be the case of an Indian Expat earning income in UAE and not paying taxes in UAE.

2.4. However, the immediate answer seems to be in negative by virtue of press release² published by the Indian Revenue Authorities. The relevant extract of the same is reproduced as under:

2.5. The press release has come in as major relief for Indian Expat earning bonafide income in UAE by virtue of employment or exercise of business of profession in UAE.

2.6. The press release categorically clarifies that income earned outside India would not be taxable in India unless it is derived from business or profession set-up in India. However, it would be worth noting that press release does not clarify any blanket exemption from the deeming provision.

3. Would Indian Expat be deemed as “Resident” in India simply because UAE does not levy personal income-tax?

3.1. The amendment uses the words ‘not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature’.

3.2. The entire phrase has been borrowed from Article 4 of OECD’s Model Tax Convention (“the Convention”) dealing with ‘Resident’.

3.3. The term ‘liable to tax’ has erstwhile been in dispute in the context of claiming double-tax avoidance treaty (“Treaty”) benefit. The matter knocked the doors of the Hon’ble Supreme Court of India (“the Court”) concerning India-Mauritius Tax Treaty in the landmark case of Azadi Bachao Andolan³. The Court categorically adjudicated that the concept of ‘liable to tax’ is different from the concept of ‘subject to tax’. The court further held that the term ‘liable to tax’ would mean right of the particular country’s government to tax and actual payment of tax could not be the criteria to deny treaty benefit. Similar view has also been taken by Mumbai Tribunal in the case of Green Emirates Shipping & Travels⁴.

3.4. Thus, based on the above rulings, the Indian Expat could possibly take a view (obviously under the India-UAE Tax Treaty) that he qualifies as Resident of UAE for the purpose of taxes as UAE government has the right to tax its Residents and thus, the new amendment should not be applicable to him merely on the basis of the fact that presently UAE does not levy any personal income tax.

4. Would Indian Expat, being lawful citizen of India, be called as ‘stateless person’?

4.1. The Memorandum explaining the rationale of bring in the new amendment concerning deemed residential status refer to issue of ‘stateless person’.

4.2. The term ‘stateless person’ is not defined in the Act. Thus, reference could be drawn from commentary to the Convention.

4.3. The commentary elaborates ‘stateless person’ as “a person who is not considered as a national by any State under the operation of its law”. Thus, it could be interpreted that the concept of stateless person is something associated with nationality.

4.4. However, the amendment deems ‘Indian Citizen’ as deemed “Resident”. Thus, could Indian Citizen be terms as non-nationals for the purpose of the amendment? If not so, could Indian Citizen rightfully claim not to be treated as ‘stateless person’?

4.5. The above topic (emanating from the Memorandum) definitely do not override the provisions of the Act. However, clarification in this regard would be appreciated from the Indian Revenue Authorities.

5. Would there be circular reference in calculating total income to avail monetary exception of fifteen lakhs?

5.1. The amendment would not be applicable in the scenario where total income other than income from foreign sources, of the Indian Expat does not exceed fifteen lakh rupees during the previous year.

5.2. In this connection, it would be worth noting the definition of ‘total income’ in the Act. As per the Act, ‘total income’ means “total amount of income referred to in section 5, computed in the manner laid down in this Act”.

5.3. The creation of the loop as above would certainly not be the intention. However, appropriate modification in this regard would be appreciated from the Indian Revenue Authorities.

6. Would reduction in ‘period of stay’ benefit be redundant in light of India-UAE treaty?

6.1. The amendment reduces the ‘period of stay in India’ benefit from one hundred and eighty-two (182) days to one hundred and twenty (120) days for Citizens or PIO and having total income (other than income from foreign sources) exceeding fifteen lakh rupees during the previous year to qualify as “Resident” in India.

6.2. However, section 90 of the Act empowers the individuals to apply treaty provisions over the domestic law in case treaty provisions are more beneficial. The relevant text of section 90 is reproduced as under:

6.3. Thus, the Indian Expat may take shelter of India-UAE treaty which has criteria of spending more than 182 days in UAE cumulatively in a calendar year to be treated as “Resident” of UAE for tax purposes. The relevant extract of Article 4 of India-UAE treaty is reproduced as under:

6.4. Basis above, the amendment concerning reduction in ‘period of stay’ benefit from 182 to 120 days may prove to be redundant as Indian Expat may:

• (i) positions himself as being ‘liable to tax’ in UAE (refer analysis in para 3 above); and
• (ii) spend more than 182 days in UAE in particular calendar year (overlapping financial year in India) for the purpose of employment / business or profession

7. Is the objective behind reducing ‘period of stay’ benefit achieved?

7.1. The Memorandum highlights the practices of individuals of managing their stay in India to remain “Non-Resident” and thereby not declaring and paying their fair share of income-tax to Indian Government.

7.2. The relevant extract of the Memorandum is again reproduced as under:

7.3. The objective seems to have been achieved in theory by way of reducing the ‘period of stay’ benefit. However, the achieved objective may get nullified by treating such individuals as “Resident but Not Ordinary Resident” in India.

7.4. As per section 5 of the Act, income of the “Resident” shall include income accrues or arises outside India during the particular financial year. However, the same section carves out an exception in the case of person who is “Resident but Not Ordinary Resident” in India.

In the case of a person “not ordinarily resident” in India, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

The relevant extract of section 5 of the Act is reproduced as under:

7.5. Basis the above, it is apparent that in case of the India Expat becoming a “Resident” by virtue of the amendment, he would still be categorized as “Resident but Not Ordinary Resident” and thus, at-least in the initial years, he would not be liable to declare his global income and pay income-tax in India.

Thus, could it be said that objective as comptemplated in the Memorandum is not achieved? The question is worth debating and discussing.

7.6. The above also brings up another question as to whether the amendment itself was actually required to bring to tax only the income earned / derived from a business controlled in or profession set up in India?

The answer seems to be in negative as the existing law would in any case tax incomes accrued or arising in India irrespective of person being a “Resident” or “Non-Resident”.

7.7. Further, by treating individuals as “Resident but Not Ordinary Resident”, could there be an avenue for individual to claim Indian Residency under the domestic law or any tax treaty entered by Government of India and obtain illegitimate benefit which was never an intention? This question is also worth debating and discussing.