Government Amendment bought in at the time of passing of Finance Bill, 2020 – Residential Status for Non-Residents

[Abhishakher Gupta]

The Finance Bill every year is presented in Parliament on 01^st February and this year also it was presented on 01^st February, 2020. After the Finance Bill, 2020 is presented and discussed in Parliament; at the time of passing of Finance Bill, 2020 in Lok Sabha on 23^rd March, 2020 our Honourable Finance Minister introduced certain amendments in the Finance Bill. Though there are several amendments bought in by the Finance Minister at the time of passing of Finance Bill, 2020, this article discuss about Section – 6 of Income Tax Act, 1961 i.e. Residential Status. It is important to note that the initial amendments bought in by Finance Bill, 2020 relating to residential status, viz. period of stay for non-residents being reduced from 182 days to 120 days, Indian citizens deemed as resident of India and in case of resident but not ordinary resident 9 out of 10 previous years was to be replaced for 7 out of 10 previous years and the other additional condition of stay in India for 729 days or less in 7 previous year was proposed to be omitted, has changed to great extent while passing Finance Bill in Lok Sabha on 23^rd March, 2020 which we discuss in this article in subsequent paras.

1. Residential Status of Individual

As per the provisions of section 6(1) of Income Tax Act, an individual is said to be resident in India in any previous year, if he satisfies any one of following conditions:

(i)    He has been in India during the previous year for a total period of 182 days or more, or

(ii)   He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year.

If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions are not satisfied, the individual is a non-resident. In case of residents, we have to further consider whether such individual is resident and ordinary resident (ROR) or resident but not ordinary resident (RNOR) which we discuss later in this article.

2. Explanation to Section 6(1)

However, in order to give concession to citizens of India, in the existing Explanation below this section 6(1), it has been provided that the following categories of individuals will be treated as residents only if the period of their stay during the relevant previous years amount to 182 days or more. In other words even if such persons were in India for 365 days during the 4 preceding years and 60 days in the relevant previous year, they will not be treated as resident.

(i)    Indian citizens, who leave India in any previous year as a member of the crew of an Indian ship or for purposes of employment outside India, or

(ii)   Indian citizens or person of Indian origin engaged outside India in an employment or a business or profession or in any other vocation, which comes on a visit to India in any previous year

The Finance Bill, 2020 originally proposed an amendment whereby the visit of Indian citizens or person of Indian origin who are non-resident has been restricted to less than 120 days in a year in all the cases. This amendment will affect the frequent visit of the non-residents as non-resident Indian will have to restrict their stay in India to less than 120 days, otherwise such non-resident Indian will be considered as resident and liable to pay tax on total income accrued or deemed to accrue, or received or deemed to be received in or outside India. This may cause genuine hardship to many Indian citizens or person of Indian origin if they have to stay in India for a period of 120 days or more on account of health, social obligation, taking care of the parents or any other contingency. On representation of various affected persons across the globe and professionals, Government of India at the time of passing of Finance Bill 2020 on 23^rd March, 2020 has substituted above amendment with, this reduced period of 120 days shall apply, only in cases where the total income in India other than income from foreign source of such citizen of India or person of Indian origin during the previous year exceeds ₹ 15 lakhs. Accordingly, in case of citizen of Indian or person of Indian origin, who comes on a visit to India in any previous year and his total income in India other than income from foreign source is upto ₹ 15 lakhs during such previous year, he can stay in India upto 181 days and such Indian citizens or person of Indian origin will not be considered as resident in India despite the fact that such individual was in India for 365 days or more in the preceding four years. From now onwards, any Indian citizen or person of Indian origin who comes to visit in India is required to keep a note on his total income in India besides the number of days he stays in India. As per explanation, Income from Foreign Source includes all foreign income other than income from business outside India which is controlled from India or Profession outside India which is setup in India. According to this explanation, while calculating total income in India other than income from foreign source, for a citizen of India or person of Indian origin who comes to visit in India during any previous year, any salary or income from house property earned in foreign or interest on FCNR and NRE deposits or any other foreign income except income from business which is controlled from India or profession setup in India shall not be included.

3. Section 6(1A) – Newly inserted by Finance Act, 2020

The Finance Bill, 2020 originally proposed an amendment in section 6 by inserting sub-section (1A), whereby an Indian citizen who is not liable to pay tax in foreign country or foreign territory due to his domicile or residence or criteria of similar nature shall be deemed to be a resident in India irrespective of the fact that such Indian citizen was not in India for more than 182 days during the year and consequently liable to pay tax on global income. Now due to amendment proposed while passing the Finance Bill, the above provision stands cancelled and a new provision has been inserted, Notwithstanding anything contained in section 6(1), a individual who is a citizen of India having income in India other than income from foreign source exceeding ₹ 15 lakhs shall be deemed to be resident in India if he is not liable to pay tax in the foreign country or foreign territory due to his domicile or residence or criteria of similar nature irrespective of the fact that such Indian citizen was not in India for 182 days or 120 days or whatsoever for any period. In other words, a citizen of India irrespective of the fact that such citizen has been in India or not during any previous year, will be deemed to be a resident of India and consequently liable to pay tax on global income, if such citizen of India is not liable to pay tax in foreign country or foreign territory due to his domicile or residence or criteria of similar nature and his total income in India other than Income from foreign source is more than ₹ 15 lakhs.

Further, after deciding whether a person is a resident or non-resident, we have to examine whether such person is resident and ordinary resident (ROR) or resident but not ordinary resident (RNOR).

4. Section 6(6) – Conditions for Resident but not Ordinary Resident (RNOR)

Under the existing provisions of the Income Tax Act, an individual is said to be a resident but not ordinary resident (RNOR) if he satisfies any of the following conditions:

(i)   If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or

(ii)  If such individual has during the 7 previous years preceding the relevant previous year been in India for a period of 729 days or less.

It is important to note that the proposal under Finance Bill, 2020 initially had proposed to replace the above additional conditions, wherein 9 out of 10 previous years was to be replaced for 7 out of 10 previous years and the other additional condition of stay in India for 729 days or less in 7 previous year was proposed to be omitted. Now, while passing the Finance Bill 2020 in Lok Sabha, above amendment stands cancelled i.e. above two existing provisions relating to 9 out of 10 previous year and stay in India for 729 days or less in 7 previous year remain as it is and following two additional clauses has been added in section 6(6) of Income Tax Act.

(iii)   a citizen of India or person of Indian origin being outside India makes a visit to India and stays in India for 120 days or more and less than 182 days and his total income other than income from foreign sources exceeds ₹ 15 lakhs, or

(iv)   a citizen of India or person of Indian origin irrespective of the fact that such citizen has been in India or not during any previous year, if such citizen of India is not liable to pay tax in foreign country or foreign territory due to his domicile or residence or criteria of similar nature and his total income in India other than Income from foreign source is more than ₹ 15 lakhs.

5. Brief Analysis of above provisions

Summarising the above provisions, in case of citizen of Indian or person of Indian origin, who comes on a visit to India in any previous year and his total income in India other than income from foreign source is upto ₹ 15 lakhs during such previous year, he can stay in India upto 181 days and such Indian citizens or person of Indian origin will not be considered as resident in India i.e. he shall be treated as non-resident in India despite the fact that such individual was in India for 365 days or more in the preceding four years. It is important to note that Income from Foreign Source includes all foreign income other than income from business outside India which is controlled from India or Profession outside India which is setup in India. Now further if such citizen of India or person of Indian origin, who comes to a visit to India in any previous year and his total income in India other than income from foreign source, exceeds ₹ 15 lakhs during such previous year, his period of stay in India shall be restricted to less than 120 days in order to maintain the status of non-resident in India. If his period of stay in India is 120 days or more but less than 182 days and his income in India other than income from foreign source exceed ₹ 15 lakh, he shall be treated as resident in India. Once he becomes resident in India, we have to further determine whether he is a resident and ordinary resident or resident but not ordinary resident. As per new clause added in section 6(6) by Finance Act 2020, a person shall be deemed to be a resident but not ordinary resident (RNOR), who is a citizen of India or person of Indian origin being outside India makes a visit to India and stays in India for 120 days or more but less than 182 days and his total income other than income from foreign sources exceeds ₹ 15 lakhs. The benefit to such person on becoming resident but not ordinary resident is that the income accruing or arising to him outside India except income from business outside India which is controlled from India and income from profession outside India which is setup in India, is not to be included in his total income while paying taxes in India.

Going further, if a citizen of India or person of Indian origin having income in India other than income from foreign sources exceeding ₹ 15 lakhs shall be deemed to be resident in India if he is not liable to pay tax in the foreign country or foreign territory due to his domicile or residence or criteria of similar nature irrespective of the fact such Indian citizen or person of Indian origin was not in India for 182 days or 120 days or for any period whatsoever. In other words, a citizen of India or person of Indian origin irrespective of the fact that such citizen has been in India or not during any previous year, will be deemed to be a resident of India and consequently liable to pay tax on global income, if such citizen of India is not liable to pay tax in foreign country of foreign territory due to his domicile or residence or criteria of similar nature and his total income in India other than Income from foreign source is more than ₹ 15 lakhs. Once he becomes resident in India, we have to examine whether he is a resident and ordinary resident or resident but not ordinary resident. As per new clause added in section 6(6) by Finance Act 2020, a person shall be deemed to be resident but not ordinary resident (RNOR), who is a citizen of India irrespective of the fact that such citizen has been in India or not during any previous year, if such citizen of India is not liable to pay tax in foreign country or foreign territory due to his domicile or residence or criteria of similar nature and his total income in India other than Income from foreign source is more than ₹ 15 lakhs. The benefit again to such person on becoming resident but not ordinary resident is that the income accruing or arising to him outside India except income from business outside India which is controlled from India and income from profession outside India which is setup in India, is not to be included in his total income while paying taxes in India.