Resident Status for Income Tax: You can be considered resident, taxed in India even if you haven’t spent even a day in the country: here’s how

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The residence status of an individual for tax purposes is generally based on the period of stay in India during a financial year. The residency rule under the Income Tax Act requires a natural person to be present in India during the relevant year for at least 182 days to be considered a resident. In addition, in some cases, even a presence in India for a cumulative period of 60 or 120 days in a single fiscal year may make the person an Indian tax resident, subject to certain conditions.

Thus, being in India for a minimum number of days has always been an essential prerequisite for an individual to be able to be considered a tax resident of India and to expose a certain portion of their aggregate income to tax in India. .

Now the question is whether someone can be considered a tax resident of India even if they haven’t spent a single day in India in a year? The answer is yes. Let’s see how.

New concept of renowned residence

In the 2020 Union budget, a new residence rule has been introduced with effect from the 2020-2021 financial year. This rule only applies to Indian citizens, who have income from Indian sources above Rs 15 lakh during a fiscal year. These Indian citizens are considered tax residents if they are not subject to tax in another country by reason of their domicile or residence or any other similar criteria. As a departure from the normal rule, the new provision aims to treat a natural person as an Indian tax resident on the basis of their citizenship rather than residence or period of stay in India.

Citizenship is to be determined on the basis of the Indian Citizenship Act, 1955 (‘ICA’). Article 3 of the ICA lists various criteria such as birth, ancestry and registration on the basis of which a person can become an Indian citizen. However, not all NRI, PIO, and OCI cardholders may be Indian citizens. The application of Section 3 of the ICA will need to be verified to determine the status of their Indian citizenship.

Who are the targets of this new rule?

The tax laws of many countries around the world seek to tax a natural person on the basis of a minimum period of stay in that country during the relevant taxable period. A natural person can avoid becoming a tax resident of a country by limiting his length of stay below the threshold number of days and, thus, reducing or avoiding the tax liability on a substantial part of his income. in this country.

In some cases, people may plan and carefully distribute their stay over two or more countries so as not to cross the threshold for the number of days in either country. Consequently, these persons will not be considered as tax residents of a country in the world. Under such tax planning, a significant portion of the aggregate income of such individuals may either remain untaxed or be subject to a much lower level of taxation. In the tax world, these people are referred to as “stateless”.

Bilateral tax treaties concluded by countries, which generally deal with problems of double taxation of the same income in the hands of one person in more than one country, do not deal with this particular case of double non-taxation of stateless persons.

Specifically, there is a growing trend for wealthy Indian individuals (HNIs) to move their residence between several countries outside of India. Many of these countries offer long-term residence permits and tax breaks based on certain investments made in these countries. The new concept of Deemed Resident is in the nature of an anti-abuse law that seeks to remedy this wrong by treating these “stateless” Indian citizens as tax residents of India.

Scope of taxable income in India

To relieve these people, a “deemed resident” will be treated as a resident but not an ordinary resident (RNOR). Thus, the entire overall income of the individual will not be subject to tax in India. With the exception of income generated or generated or received in India, any income generated or generated outside India will be taxable in India in the hands of such “deemed resident”, only if it is from a controlled company or a company. profession established in India. .

Significantly, anyone who is considered a “deemed resident” may not be eligible for benefits under a tax treaty entered into by India because they may not be considered a tax resident of another country. However, he / she can still qualify for the Foreign Tax Credit (FTC) in India from some of the income taxes paid in other countries, which are also taxed in India.

Indeed, the eligibility condition under Article 6 (1A) of the Law is that the natural person should not be subject to tax in another country by reason of his residence. However, it could be subject to tax elsewhere based on other criteria (usually withholding tax). For example, royalties or charges for technical services may be subject to taxation in the source country (where the payer is located) through the deduction of withholding tax. If the same is again subject to tax in India, based on deemed residence, then the FTC can be used in India.

Conclusion

Globally, a consensus seems to be forming to act against taxpayers who manage to avoid or significantly reduce their global tax burden by distributing their stay or activities among different tax jurisdictions. A recent agreement reached within the Organization for Economic Co-operation and Development between more than 130 countries, including India, prescribing a minimum overall corporate tax of 15%.

It highlights the willingness of tax administrations around the world in this regard. The recent “Deemed Residents” Act is an important step India has taken to address the challenges faced in bringing “stateless” people to tax. However, it will be interesting to see how the Indian tax administration implements and enforces this law against non-residents.

(S. Vasudevan- Executive Partner & Karanjot Singh Khurana- Partner Lakshmikumaran & Sridharan Avocats)


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