Concept Note: Residential Status for Individuals

Nirav ShahNirav Shah    24 March 2020
Concept Note: Residential Status for Individuals

• Concept:-

Determining residential status is core tenet of ascertaining tax implications under the Income Tax Act, 1961 (the Act). In India, as in many other countries, the charge of income tax and scope of taxable income depends entirely on residential status. There are two categories – Residents and Non- residents. Residents are further classified into (a) Resident and Ordinarily resident and (b) Resident but Not Ordinarily resident. This classification is very crucial to determine extent of compliance, taxability and disclosure requirements which will need to be adhered to under the Act.

• Background:-

Finance Minister while presenting Finance Bill to Lok Sabha for their approval has changed following aspects in relation to residential status in India in Section 6 on 23rd of March 2020.

The Amended Section 6 will read as follows:
Residence in India.

6. For the purposes of this Act,

(1) An individual is said to be resident in India in any previous year, if he:

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or
(b) [* * *]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

[Explanation 1]. In the case of an individual,:

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted ;

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, for the words "sixty days" occurring therein, the words "one hundred and twenty days" had been substituted.

Explanation 2. For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if 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;
.........

(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is:

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less: or

(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or

(d) a citizen of India who is deemed to be resident of India under clause (1A).

Explanation : - For the purposes of this section, the expression "income from foreign sources" means income which accrues or arises outside of India ( except income derived from a business controlled or profession set up in India).

The text highlighted in blue above are the changes proposed by the Finance bill 2020 as amended by the Notice of Amendment while presenting to Lok Sabha on 23rd of March 2020 by the Finance Minister.

Impact of these changes

1. Changes as regard to determination of residential status in case of Indian citizens and persons of Indian origin (PIO) coming on a visit to India

• One of the conditions to trigger residency in India, is that an individual should be present in India for 60 days (or more) in the relevant financial year and 365 days (or more) in past 4 years.

• The 60 days threshold was extended to 182 days in case of an individual being an Indian citizen or PIO coming on a visit to India.

• While Finance Budget 2020 proposed to reduce the number of days of stay of such individuals from 182 days to 120 days. Its scope has now been restricted.

• The amendment at the enactment stage of the Finance Bill 2020 provides that the reduced threshold of 120 days will apply only for Indian citizens or POI, having a total income, other than income from foreign sources, exceeding Rs.15 lakhs during the relevant previous year.

• This means for the Indian citizens and POIs whose income fails to meet the threshold, the erstwhile rule of 182 days stay shall apply. Accordingly, lower income group individuals can still enjoy the erstwhile longer stay time of 182 days.

2. Changes as regard to deemed residency provisions of section 6(1A)

• The focus has been to make Citizen of India taxable who are otherwise not taxed else where or so called stateless citizens – however now there is a threshold, that this provision would only apply if such Citizen of India has India sourced income above Rs. 15 lakhs in the relevant previous year.

So, if one has India sourced income exceeding Rs. 15 lakhs in relevant previous year (which is anyway taxable in India) this would trigger for him evaluation of deemed residency rule u/s. 6(1A).

• While the erstwhile proposed provision had the effect of covering all the Indian citizens irrespective of the income they earned from India, now the provision is mellowed down to cover only such Indian citizens who meet the threshold.

• Further, in the year in which the deemed residency provisions are triggered, the individual shall be considered as "not ordinarily resident" by virtue of amendment in section 6(6) of the Act.

3. Changes as regard to status of a "not ordinarily resident" (NOR)

• The Finance Bill 2020 proposed to modify the conditions for NOR status by providing that an individual/ manager of an HUF has to be a non-resident in India in 7 out of 10 previous years preceding the concerned previous year. Additionally, the condition for physical stay of 730 days during preceding 7 previous years was also proposed to be removed.

• However, at enactment stage, there is no change in the aforesaid NOR status for individuals and managers of HUF i.e. it continues to be 9 out of 10 previous years. However, two new clauses have been added to provide that the following individuals would qualify as a NOR, in addition to persons listed in erstwhile provisions –

- An Indian citizen or POI on a visit to India for an overall period of 120 days (or more) and less than 182 days and having a total income, other than income from foreign sources, exceeding INR 15L during the relevant financial year.

- An Indian citizen who is deemed to be a resident under provisions of section 6(1A) of the Act

Thus from the earlier proposal these changes have diluted the impact for Non residents considerably.

Thus, in our view, it’s important to plan well and be very careful about gaining and protecting one’s residential status and fully understand impact of compliance and taxability scope attached to one’s residential status.

• Way Forward:-

At Fame Advisory, we shall be glad to assist as follows:

1. Impact Analysis

a. We would discuss and evaluate current facts of particular situation
b. We shall review applicable details of physical presence; active roles being played and various responsibilities discharged by the person In India.
c. We shall understand the job descriptions of employees of overseas entities and verify the exact scope of their activities
d. Based on above, we shall identify potential risks of current situation

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

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