NEW TAX RESIDENCY RULES FOR INDIVIDUALS

By Uditi Jain

Modifications in Residency Provisions

The Indian Income Tax Act (ITA) bases the incidence of taxation on the stature of residence of the taxpayer and also source of income. While an Indian resident is taxed on its entire income including global income, non-residents are only taxed on income arising from sources in India.

Section 6(1) of the ITA provides that an individual shall be an Indian Resident in a year if he:

• Is in India for an overall period of 365 days or more within four years preceding that year; and
• Is in India for an overall period of 60 days or more in that year

Explanation 1 to this section further clarifies that with regard to ii), where the taxpayer is a citizen of India or a person of Indian origin (“PIO”) who was visiting India during the previous year, the requirement of having to spend 60 days or more in the previous year shall be extended to 182 days. This extension of time was specifically provided to Indian citizens and PIOs to allow them to visit India for a longer period of time without qualifying as residents.

Taking note of the fact that many Indian citizens and PIOs have taken advantage of the extension of time to carry on substantial economic activities in India without qualifying as residents, the new budget now proposes to limit the extension of time from 182 days to 120 days. In other words, an Indian citizen or PIO will qualify as a tax resident of India if he is in India during that year for 120 days or more and has been in India for a total of 365 days over the course of the 4-year period preceding that year. 

The Budget further proposes to streamline the test for Resident but not Ordinarily Resident (“RNOR”) by simply providing that an individual shall qualify as an RNOR if such individual has been a non-resident in India for 7 out of the 10 years preceding the relevant previous year vis-à-vis the previous benchmark of a period of 9 out of 10 years. The same amendment has also been proposed with respect to HUFs as well.

Moreover, the Budget has also proposed to add a new Section 6(1A) which provides that an Indian citizen shall be deemed to be Indian tax resident if s/he is not liable to tax in any other country by reason of their domicile or residence or similar criteria, regardless of whether such individual meets the residency test requirements under Section 6(1) of the ITA. It is worthwhile to note that, in the given aspect, however, the Government issued a press release clarifying that the new provision is not intended to include Indian citizens who are bonafide workers in other countries, including Middle East.

These proposed amendments seem to seek to curb the ability of Indian citizens and PIOs specifically, high net worth individuals who otherwise seek to avoid qualifying as Indian tax residents by simply ensuring that they do not meet the residency day count tests.

It is worthwhile to however not that persons resident in countries where India has Double Taxation Avoidance Agreement (‘DTAA/ Treaty’) countries could take recourse to the ‘tie-break’ provisions in the applicable Treaty. This requires the concerned individual to:

1. Obtain tax residency certificate from authorities of the relevant country; and
2. Satisfy the specific conditions to be considered as tax resident of such country. 

Assuming that the above conditions are satisfied, in a typical tie-break rule, the following sequence would have to be followed for determining the country in which the individual is ultimately tax resident:

a) Country where permanent home is available to such individual;

b) If permanent home is available in both countries, then tax residency would depend on the country where personal and economic relations are closer (center of vital interests).

c) Where center of vital interests cannot be determined or permanent home is not available in either country, then tax residency would depend on country of habitual abode.

d) In case of habitual abode in both or neither of the countries, then tax residency would depend either on nationality of the individual; or as per mutual agreement between competent authorities of both countries.

If any Treaty benefit is claimed in India, technically the individual would be required to file a tax return in India and communicate the tax position to the Indian-tax authorities, however, the possibility of litigation with Indian tax authorities on account of any contrary interpretation cannot be ruled out. 

In conclusion, Indian citizens or PIO who wish to continue tax non-resident status in India on and from 1 April 2020, need to carefully monitor days of stay in India, ensure tax residency in another country and if stay is likely to exceed 120 days in India, carefully consider treaty provision to ensure tax residency status is not altered. 

Exempting Non-resident from filing of Income tax return in certain circumstances

Sub-section 5 of Section 115A of the Act provides that a non-resident may not necessarily file its return of income where the total income consists of dividend or interest income and appropriate TDS on the same has been deducted. The ambit of the same has also been extended to the income in the form of royalty and Fees for Technical Services and appropriate TDS is already deducted i.e. to say in the case of a non-resident whose total income comprises of dividend/ interest/ royalty and FTS and appropriate TDS has been deducted, it is not mandatory for him to file a return of income.