RESIDENTIAL STATUS PROVISIONS IMPACTING NRI TAXABILITY AS AMENDED BY FINANCE ACT, 2020

[ROHIT KAPOOR]

RESIDENTIAL STATUS PROVISIONS IMPACTING NRI TAXABILITY AS AMENDED BY FINANCE ACT, 2020

Taxability: - In the Income Tax Act, 1961, taxability in hands of a person depends on its status of residence

 

Impact of amendment – Increase in scope of Total Income

Increase in scope of total Income: Income that accrues or arise outside India but is derived from business controlled in or profession set up in India to become chargeable to tax in India in the hands of such Individual.

S. No.	Nature of Income	Resident (Ordinary resident)	Resident (Not ordinarily resident)	Non resident
1	Income received or deemed to be received in India	√	√	√
2	Income accruing or arising or deemed to be accruing or arising in India.	√	√	√
3	Income through accruing or arising outside India but derived from a business controlled in or a profession set up in India.	√	√	X
4	Income accruing or arising outside India other than Income of such nature mentioned in S.No.3 above.	√	X	X
5	Income received outside India	√	X	X

Prior to Finance Act, 2020

Section 6 (Resident in India)

(1) The individual is said to be resident if he fulfil any of condition as mentioned in section 6. The said provision is read as under:-

1. 1. An individual is said to be resident in India in any previous year, if he-

(a) is in India for 182 days or more during the Financial year; or

1. (b) is in India for period of 365 days or more during the 4 immediately preceding years and for 60 days or more during the Financial year.

Explanation. 1-In the case of an individual,-

In the following two cases the period of 60 days shall be substituted by 182 days.

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India.

(b) being a citizen of India, or a person of Indian origin, who, being outside India, comes on a visit to India in any previous year.

Note 1 :- Explanation 1(a) to section 6

An individual is said to be a resident in India if he fulfills any of the conditions 182 days or 60 days as mentioned in Section 6(1). The explanation 1(a) to section 6 talks about a citizen of India who lives in India as a member of crew of a Indian ship or for purpose of employment outside India. In that case the period of 60 days as mentioned in Section 6(1) was substituted by 182 days. There is no change in explanation 1 to clause a by Finance Act, 2020.

Note2:- There is no change in explanation 1(a) in section 6 meaning thereby the period of 182 days shall prevail in case of Indian Citizen who leaves India as a member of crew of Indian ship or for the purpose of employment outside India.

Note 3 :- Explanation 1(b) to section 6

An individual was said to be a resident in India up to Finance Act, 2019 if he fulfills any of the conditions 182 days or 60 days as mentioned in section 6(1). The explanation 1(b) to section 6 talks about a citizen of India or person of Indian origin who being outside India comes to visits in India. In that case the period of 60 days as mentioned in section 6(1) was substituted by 182 days.

The amendment made by Finance Act, 2020 is as under:-

An individual who is an Indian citizen or a person of Indian origin having total income, other than the income from foreign sources, exceeding ₹ 15 lakh in the said case the period for stay in India shall be 120 days. The said amendment is only made in explanation 1(b) to section 6 and only for those person whose total income other than income from foreign sources exceeds ₹ 15 Lakh.

Example of income includible while examining the applicability of threshold of ₹ 15 Lakhs

SR. No.	Particulars
1.	Dividend Income received from a company resident in India( earlier exempt but now being taxable as amended by Finance Act 2020)
2.	Interest Income received from resident in India.
3.	Capital Gain arising from transfer of an property situated in India.
4.	Capital Gain arising on transfer of shares of an Indian Company.
5.	Capital gain arising on transfer of shares of a company which derives its value substantially from property situated in India.
6.	Rental Income from property situated in India.

•  The word refer here is total income which means after deduction under chapter VI and income exempt u/s 10

Example of income not includible while examining the applicability of threshold of ₹ 15 Lakhs

Sr. No.	Particulars
1.	Salary Income received on account of services rendered outside India.
2.	Dividend income arising from overseas sources
3.	Interest income arising from overseas sources.
4.	Capital gain arising from property situated outside India.
5.	Rental Income from property situated outside India.
6.	Business Income from overseas sources having no nexus with India.

Note 4 :- Introduction of Section 6(1A) deemed resident applicable if total income exceeds ₹ 15 lakhs. {Section 6(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 ₹ 15 Lakhs 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. Therefore, if an Indian citizen having Indian Income more than ₹ 15 Lakh and he is liable to tax on its foreign income in other country then in that case he will be not considered as Deemed Resident.”

* The intent of law is to tax such persons who were stateless. The categories of such persons are mainly filmstar or sportsman or other persons.

e.g. Mr. A , an Indian Citizen, stayed 40 days in India, 130 days in Singapore, 110 days in England and 85 days in Dubai having Income from INDIA exceeding ₹ 15 lacs. He was not resident in any state due to his lesser stay in all countries. Hence, Stateless and will be covered by the provisions of 6(1A). Continuing this example if he was sportsman then he will be non-resident in India and was liable to special rate of 20% u/s 115BBA. But now as per sec. 6(1A) he will be considered as deemed resident and benefit of special rate of tax will not be available to him.

Note 5:- Citizen of India can normally be judged from the passport. If the assessee is holding Indian passport then he is said to be Indian citizen.

Stateless persons to be considered as deemed residents –w.e.f. FY 2020-21

• An individual, being a citizen of India, having total income, other than the income from foreign sources*, exceeding ₹ 15lakh rupees during the year shall be deemed to be resident in India in that 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.

• Such deemed residents will be considered to be ‘Resident but not Ordinarily Resident’ under the Act

• Memorandum to Finance Bill ,2020 explains the intent behind introduction of the provision as under :

“The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country.”

• Objective of the provision is to tax such individuals who are stateless persons and are not liable to tax in any country by reason of his residence

Section 6(6)- Not Ordinary Resident prior to Finance Act, 2020

Note 6:- (Provision related to not ordinary resident)

Earlier an individual/HUF is said to be a not ordinary resident in India in previous year if he is covered by any of the following condition as laid down in Section 6(6).

Condition 1:-

Such individual or Karta of such HUF has been a non-resident in 9 out of 10 preceding years. or

Condition 2:-

Such Individual or Karta of such HUF has been in India for a period of less than 730 days during preceding 7 years.

Further as per provision of section 5(1) a individual or HUF who has been given a status of not ordinary resident is not liable to pay tax in respect of Income which accrue or arise to him outside India during the relevant previous year. But the income accrue or arise to an individual/HUF outside India from the business/profession set up in India will be taxed in India in case of not ordinary resident.

Amendment made in Section 6(6) (NOT ORDINARILY RESIDENT) by Finance Act, 2020.

Two new clauses has been added in 6(6) and if Individual/HUF fulfills any of the condition then in that case the person shall be said to a not ordinary resident. The summary of the same is as under:-

(a) Such individual or Karta of such HUF has been a non-resident in 9 out of 10 preceding years. or

(b) Such Individual or Karta of such HUF has been in India for a period of less than 730 days during preceding 7 years;or

(c) a citizen of India, or a person of Indian origin, living outside India and came on visit to India, such individual having total income (other than the income from foreign sources) exceeding ₹ 15 lakhs during the previous year and who has been in India for a period exceeding 120 days but less than 182 days. or

(d) a citizen of India who is deemed to be a resident as per section 6(1A). Therefore, if every Indian citizen whose income in India excluding foreign income except income from business/Profession controlled from India exceeds ₹ 15 lakhs and he is not liable to tax on foreign income in any other country by reason of his domicile or any other criteria.

For Example:-

Particulars	Stay in India during FY 2020-21.	Stay in India in last  four years   i.e.  2016-17 to 2019-20.	Indian Income during FY 2020-21.	Whether liable to tax in  any other  country	Status
Indian Citizen or Person of Indian  origin visiting India	119 Days	368 Days	₹ 16 Lakhs	Yes	An individual will said to be a NON-RESIDENT. As per the provisions of Section 6(1) read with Explanation 1(b).
Indian Citizen visiting India.	119 Days	368 Days	₹ 16 Lakhs	No	An individual will said to be a NOT ORDINARY  RESIDENT. As per the provisions of Section 6(6)(d) read with Section  6(1A).
Person of Indian origin visiting India.	119 Days	368 Days	₹ 16 Lakhs	No	An individual will said to be a NON-RESIDENT. As per the provisions of Section 6(1) read with Explanation 1(b).
Person of Indian origin visiting India.	120-181 Days	368 Days	₹ 16 Lakhs	Yes	An  individual  will  said to be a NOT ORDINARY   RESIDENT. As per the provisions of Section 6(6) read with  clause c.
				No
Indian Citizen or Person of Indian origin visiting India.	181 Days	368 Days	₹ 14 Lakhs	No	An individual will said to be a NON-RESIDENT. As per the provisions of Section  6(1) read with Explanation  1(b).
				Yes
Indian Citizen or Person of Indian  origin visiting India.	182 Days	368 Days	₹ 14 Lakhs	Yes	An individual will said to be a RESIDENT. As per the provisions of Section 6(1)  read with Explanation 1(b).
Indian Citizen who leaves India as a  member of crew of  Indian ship or for  the purpose of  employment outside  India.	120-181 Days	368 Days	₹ 16 Lakhs	Yes	An individual will said to be a NON-RESIDENT.  As per the provisions of Section  6(1) read with Explanation  1(a).
Indian Citizen who leaves India as a  member of crew of  Indian ship or for the  purpose of employment  outside India.	120-181 Days	368 Days	₹ 16 Lakhs	No	An individual will said to be a NOT ORDINARY RESIDENT. As per the provisions of Section 6(6)(d)  read with Section 6(1A).
Indian Citizen who leaves India as a  member of crew of  Indian ship or for the  purpose of employment  outside India.	120-181 Da Ys	368 Days	₹ 14 Lakhs	Yes	An individual will said to be a NON RESIDENT. As per the provisions of Section 6(1) read with explanation 1(a).
				No
Indian Citizen who leaves India as a  member of crew of  Indian ship or for the  purpose of employment  outside India.	182 Days	368 Days	₹ 16 Lakhs	Yes	An individual will said to be a RESIDENT. As per the provisions of Section 6(1) read with Explanation 1(a).
				No	An individual will said to be a RESIDENT. As per the provisions of Section 6(1) read with Explanation 1(a).
Any     other Indian Citizen  does not visit to  India	Nil	Nil	₹ 14 Lakh	Yes	NON    RESIDENT       as per Section 6(1) read with explanation 1(b).
				No
Any other Indian Citizen does not visit to India	Nil	Nil	₹ 16 Lakh	Yes	NON    RESIDENT as per Section 6(1)   read with explanation 1(b).
				No	An individual will said to be a NOT ORDINARY RESIDENT. As per the provisions of Section 6(6)(d) read with  Section 6(1A).

What is  the   importance   of  Section  6  with respect    of Double Taxation Avoidance Agreement?

• A DTAA is applicable only to person who are Residents of contracting state

(Article 1)

• Therefore, residence has to be determined for the purpose of applicability of a DTAA.
• No Treaty benefit can be claimed by a person if it is not a resident of either of the contracting states.
• If an  individual is a resident  of both the contracting state then “TIE BREAKER TEST” is to be applied for DTAA.

• The impact of changes brought up by the change in Residential status.
  • Change of Income tax rates in Indian Income.
  • Taxability of Income accrues outside India but derived from business controlled or profession set up in India.

Status of residence of an individual under DTAA – General Tie Breaker Rule.

A	Permanent home	Permanent home means a home arranged and retained for permanent use;  not intended for short duration
B	Economic/ personal Interest	-Place of Business/Profession -Employee -Personal interest (i.e. family and social relations Economic relations)
C	Habitual abode	Frequency, duration, and regularity of stays
D	Nationality	Country of which the individual is a national
E	Competent Authorities	Both  the countries  to  determine the residential status if residential status cannot be determined by applying the tie breaker rule

• Tie breaker rule to be applied in the above order. Importance of tie breaker rule to increase as an individual is more likely to qualify as resident of both countries pursuant to the amendment.

As per section 90(4) provides that the non-resident to whom the agreement referred to in sec. 90(1) applies shall be allowed to claim relief under such agreement if TAX RESIDENCE CERTIFICATE obtained by him from the government of that country or specified territory, is furnished declaring his residence of the country outside India or specified territory outside India, as the case may be.

Effect on tax by shifting status from Non Resident to Not Ordinary Resident

Position up to 31.03.2020 in case where Mr. A (citizen of India) visits to India for 150 days
Particulars	Singapore DTAA	UAE DTAA	Hong Kong DTAA	Status (Mr. A is non-resident in India but resident of other country.)
Dividend paid by Indian Company ₹ 20Lakhs	15%	10%	5%	Note 1:- The Individual shall be Non resident individual as his period of stay was less than 182 days. The tax rate as per 115 A(1)(a)(i) was 20%.The effective tax rate works out to lower of 20% or DTAA rate. Meaning thereby the dividend was taxable @ 15,10,5 in India and was not taxable in Singapore, UAE and Hong Kong.

 

Effect of amendment by Finance Act 2020 in case where Mr. A (citizen of India) visits to India for 150 days during F.Y. 2020-21
Particulars	Singapore DTAA	UAE DTAA	Hong Kong DTAA	Status (Mr. A is non-resident in India but resident of other country.)
Dividend paid by Indian Company ₹ 20Lakhs	15%	10%	5%	Note 1:-The Individual shall be Not ordinary resident as per sec. 6(6)(c). Note 2:- Mr. A is Not ordinary resident for India and resident for other country. It is presumed that by applying tie breaker test Mr. A is resident for India and Non resident for other country as per DTAA. Note 3:- Such dividend income will be taxable in India at normal slab rate which may be as high as 35.88%. However the DTAA benefit will not be available.

Note: - The definition of non-resident has been discussed in sec. 2(30) and as per the definition a non-resident means a person who is not a “resident”( and not for the purpose of sec. 92,93 and 168). Therefore the status of not ordinary resident will be covered under resident. However for applicability of transfer pricing provisions the not ordinary resident will come under the category of non-resident.

Concessional tax rates available to non-residents under the Act:–

Section	Income	Concessional Income-Tax Rate
115A(1)(a)(i)	Dividend income (subject to further reduced rates under DTA)	20
115A(1)(a)(ii)	Interest received from Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency	20
115A(1)(a)(iia) 115A(1)(a)(iiaa)	Interest received from an infrastructure debt fund referred to in section 10(47) Interest received from an Indian company on rupee denominated bonds (specified in section 194LC)	5
115A(1)(a)(iiab)/ (iiac)	Interest on rupee denominated bond referred to in section 194LD and income from units of business trust referred in section 194LBA	5
115(1)(a)(iii)	Income received in respect of mutual fund units specified under 10(23D) or units of Unit Trust of India purchased in foreign currency (subject to further reduced rates under DTA) [Dividend income from mutual funds eligible for rate prescribed under DTAA in respect of dividend income (DR. Rajnikant R. Bhatt versus CIT, [1996 (8) TMI 544 - AUTHORITY FOR ADVANCE RULINGS]	20
115A(1)(b)	Royalty or fees for technical services received by a foreign company or non-resident non-corporate assessee (subject to certain conditions)	10
115AC	interest or dividend income arising in the hands of a non-resident from specified bonds or Global Depository Receipts or income in the nature of long-term capital gains arising from transfer of the bonds	10

IMPACT OF PROPOSED AMENDMENT ON TWO CATEGORIES OF NRIs

Impact of amendments – summary

Once an individual qualifies as not-ordinarily resident pursuant to the amendment, the following consequences will follow:

• Increase in scope of total income: Income that accrues or arises outside India but is derived from business controlled in or profession set up in India will now become taxable in India in the hands of such individual.

• Loss of exemptions: Various exemptions that are available in the hands of non-residents will be lost once the status changes to RNOR. However, exemptions in respect of interest on NRE account balance and FCNR deposits will not be impacted by the amendment.
• Loss of concessional rate of tax/ presumptive scheme benefits: Various nature of income that are taxable at concessional rates in the hands of non-residents (5% to 20%) will become taxable at normal slab rate applicable in the hands of such individuals.
• Benefits provided under DTAA lost: Once an individual becomes resident of India as well, the importance of tie breaker rule will increase to determine status of residence of the individual under the DTAA. If individual qualifies as resident of India after applying the tie breaker test, various concessions given under the DTAA with regard to capital gain, dividend, etc will be lost
• Foreign assets reporting: Once an individual qualifies as a resident (including RNOR), he will be required to furnish a schedule called Foreign Asset in the return of income disclosing details of all assets held outside India
• Increased onus to substantiate non-taxability of income: Indian Income Tax Officer will have greater jurisdiction on such individuals and such individuals will be required to justify as to why income from a particular source is not taxable in India by establishing that such income accrues or arises outside India

Note:- The most crucial points are that on becoming resident he has to disclose all his foreign assets. As per sec. 139(1) read with 4th proviso to sec 139(1), a person who (a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India;

or (b) is a beneficiary of any asset (including any financial interest in any entity) located outside shall furnish, on or before the due date, a return in respect of his income or loss for the previous year in such form and verified in such manner and setting forth such other particulars as may be prescribed:”

Now the scope of assessment for AO has been increased as he will now see all the foreign income must be from legitimate source.

SCREENSHOT OF SCHEDULE OF FOREIGN ASSETS AS SHOWN IN ITR IS REPRODUCED HERE FOR YOUR READY REFERENCE:-

Issues due to COVID-19:

Issue:- The persons who are forcefully locked down in India due to COVID-19, whether any benefit will be available to them? Answer:- As of now there is no notification from the government regarding this issue.

However, in the Case of SURESH NANDA VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-13(2012 (7) TMI 772 - ITAT DELHI), the assessee was allowed to take the benefit of forceful lock down under the provision of some other Act. In this case it is held that:- “Determination of assessee's Residential status - Held that:- Going abroad for the purpose of employment only means that the visit and stay abroad should not be for other purposes such as a tourist, or for medical treatment or for studies or the like. Going abroad for the purpose of employment therefore means going abroad to take up employment or any avocation which takes in self-employment like business or profession. Thus taking up own business by the assessee abroad satisfies the condition of going abroad for the purpose of employment covered by Explanation (a) to section 6(1)(c). Therefore the Tribunal has rightly held that for the purpose of the Explanation, employment includes self employment like business or profession taken up by the assessee abroad - The determinative test for the status of Non Resident being number of days of stay in India and in assessee's case in these three years, the days of stay being less than 182 days; the status to be applied in this case is to be held as Non Resident as claimed by assessee. Thus, the assessee will be liable to tax on income accrued in India only. The assessee's grounds in this behalf are allowed.”

Assessee can take benefit of this case, but the same has to decided by judiciary.

Discussions to this article

[Debtosh Dey]

Thanks Mr. Rohit Kapoor for such a good article. A few clarifications are required :

(1) I think, Finance Ministry/ CBDT had clarified quite sometime back that only Resident who is ordinarily resident is required to disclose foreign assets. This obligation is not with Resident but not ordinarily resident. Your article says other wise. Could you please confirm?

(2) Ref example cited in the article on residency abroad as provisioned in new section 6(1A). What if the so called 'Stateless person' earns income abroad which is taxable in that country say in your example, if the person earns salary in Singapore during his 130 days' stay there? Will he still be considered as 'deemed resident' in India even if he stayed for 40 days in India?

Regards

Debtosh Dey