The proposed Tax Residency rules for individuals as per Budget 2020
Under the Indian Income tax Law (‘ITL’), the incidence of taxation is based on the residence of the taxpayer and source of income. Worldwide income is taxed of an Indian resident and Non-Residents are only taxed on income arising from sources in India.
Present law on Residential status: The ITL sets out specific criteria to determine residence of a person. Section 6(1) of the ITL provides that an individual qualifies as a resident in India in a previous year if :
Explanation 1 to this section further clarifies that with regard to Criteria 2, where the person 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.
Indian citizens and PIOs were specifically provided this extension of time so as to allow them to visit India for a longer period of time without being qualified as residents of India.
Proposed amendment in the Law on Residential status:Government came across cases where Indian citizens and PIOs have taken advantage of the extension of time to carry on substantial economic activities in India without qualifying as residents of India and were enjoying the NRI status. The Budget has now proposed to limit the extension of time available for Indian citizens and PIOs from 182 days to 120 days.
In other words, pursuant to Criteria 2, 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 in the 4-year period preceding that year. This is a cumulative condition and only if both the conditions are satisfied, then only the person become a tax resident of India.
Further, a new Section 6(1A) is proposed to be added which provides that an Indian citizen shall be deemed to be Indian tax resident if he is not liable to tax in any other country by reason of their domicile or residence or similar criteria, regardless of stay in India.
The new Section 6(1A) doesn’t give importance to the day test criteria for residency in India. The new provision specifically states that only those Indian citizens not liable to tax in any other country by reason of their domicile or residence or similar criteria, shall be deemed to be tax residents of India. This means that if a person meets the criteria of being tax resident in foreign country and is within the scope of taxation in a foreign country India’s right to tax them under 6(1A) should not come in the picture. Even if the person is not actually paying tax by virtue of the laws of foreign country or if a foreign country exempts its residents from taxation, India cannot tax them.
The criteria for Resident but not Ordinarily Resident (“RNOR”) has also been proposed to be amended. It says that an individual shall qualify as an RNOR if such individual has been Non-resident in India for a period of 7 out of the 10 years preceding the relevant year.
This criteria prior to the amendment was that to be a RNOR, person has to satisfy any one of the condition:
The proposed amendment in the RNOR criteria is quite simple and makes it easier for an individual to qualify as an RNOR. This amendment will reduce the burden on Returning Indians and foreign nationals who may have some more time before they qualifyas tax residents in India.
By, CA Kinjal Bagadia Mehta, GPK Tax Consultants, Dubai
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