There was long persisting confusion regarding the residential status of individuals who were stuck due to the COVID -19 situation, and the Central Board of Direct Taxes (CBDT) has received various representations seeking for relaxation in the determination of residential status for the previous year (“PY”) 2020-21 from individuals who had come on a visit to India during the previous year 2019-20 and planned to leave India but couldn’t do so due to the deferral of international flights. CBDT announced that if any individual is facing double taxation even after considering the relief provided by the necessary Double Taxation Avoidance Agreement (DTAA), he/she may equip the specified information by 31st March 2021 in Form –NR. This form is to be presented electronically to the Principal Chief Commissioner of Income-tax.
Residential status of specific individuals under the Income-tax Act, 1961 Section 6 of the Income-tax Act, 1961 (the Act) restrain provisions relating to determining a person’s residency. Whether he is a resident in India or a non-resident or not ordinarily resident, an individual’s status is dependent, inter-alia, on the person in India during a previous year or years preceding the previous year.
Relaxation for the previous year 2019-20 Considering the COVID-19 pandemic and the consequent overstay of an individual who had come to India on a visit before 22nd March 2020, the Central Board of Direct Taxes (the board) was provided under section 119 of the Act to avoid original hardship in such cases. It was clarified that to determine the residential status under section 6 of the Act during the previous year 2019-20 in respect of an individual who has come to India on a visit before 22nd March 2020 and:
Has been incompetent to leave India on or before 31st March 2020, his period of stay in India from 22nd March 2020 to 31st March 2020 shall not be taken into account
Has been quarantined in India on account of Covid-19 on or after 1st March 2020 and has defunct on an excretion flight before 31st March 2020 or has been incompetent to leave India on or before 31st March 2020, his period of stay from the beginning of his quarantine to his date of departure or 31st March 2020.
Has departed on an excretion flight before 31st March 2020, his period of stay in India from 22nd March 2020 to his date of leaving shall not be taken into account.
Residential status for the previous year 2020-21 The board has received various representations requesting relaxation in determining residential status for the previous year 2020-21 from individuals who had come on a visit to India throughout the last year 2019-20 and deliberated to leave India but could not do so the suspension of international flights. The board has examined the matter, and the following facts have emerged:
A short stay will not affect Indian residency There may be a condition where a person, who was a non-resident throughout the previous year 2019-20, gets stranded in India because of the COVID-19 pandemic for some time during the last year 2020-21 (`PY 2020-21′). In such situations, there are fewer chances that the person would obtain residence status in India during the PY 2020-21 only for this reason, as described below:
A citizen of India or a person of Indian origin may become resident in India only in one of the following situations:
If his total income from Indian sources (i.e., other than the income from foreign sources) does not overtake fifteen lakh rupees in PY 2020-21 and he stays in India for 182 days or more during the PY 2020-21
If his total income from Indian sources (i.e., other than the income from foreign sources) overtake fifteen lakh rupees in PY 2020-21
He stays during PY 2020-21 for 182 days or more
He stays during the PY 2020-21 for 120 days or more and lasts for 365 days or more in the preceding four previous years.
An individual who is not a citizen of India or a person of Indian origin may become resident in India only in one of the following situations:
if he stays during PY 2020-21 for 182 days or more; or
if he stays during the PY 2020-21 for 60 days or more and stays for 365 days or more in the preceding four years.
Thus, generally, a person will become a resident in India for the PY 2020-21 only if he stayed in India for 182 days or more unless he is enclosed by the deviations considered above.
Possibilities of dual non-residency in case of general moderation Most of the countries have the situation of stay for 182 days or more for regulating residency. Thus, a person in most circumstances will be resident in only one country since there are 365 days in a year. If general relaxation for the stay period of 182 days is provided, there may be cases of double non-residency. In such a situation, a person may not become a tax resident in any country in PY 2020-21 even after staying for more than 182 days or more in India, ensuring in double non-taxation and not paying tax in any country.
Tie-breaker order as per Double Taxation Avoidance Agreement (DTAA) As discussed above, a person may become a resident in India in some cases, even if he stays for less than 182 days in India. In those circumstances, there may be a case of dual residency. However, due to the Double Taxation Avoidance Agreement (DTAA) applicability, such a person will become a resident of only one country as per the “tiebreaker rule” in the DTAA. For example, the Indo-USA DTAA contains the following tiebreaker rule in Article 4(2):
“Whereby reason of the provisions of paragraph I, an individual is a resident of both Contracting States., then his status shall be regulated as follows:
He shall be examined to be a resident of the state in which he has a permanent home accessible to him; it has a permanent home available to him in both states, he shall be considered to be a resident of the state with which his personal and economic alliances are closer (centre of vital interests)
If the state in which he has his centre of vital interests cannot be regulated, or if he does not have a persistent home available to him in either state, he shall be examined to be a resident of the state in which he has a habitual abode;
If he has a habitual residence in both States or neither of them, he shall be considered to be a resident of the state of which he is a national,
If he is a national of both states or neither of them, the contracting states competent authorities shall settle the question by mutual agreement.
Thus, as per the provisions of the Indo-USA DTAA, a person can enhance a resident of two countries only in the following case:
he has an indefinite home available to him in both countries or none of the two countries; and
centre of vital interests cannot be determined; and
he has a habitual abode in both States or neither of them; and
he is a national of both States or neither of them.
Even in such circumstances when all the above (a) to (d) are applicable (which may be a scarce situation), the Indo-USA DTAA provides a resolution mechanism through Mutual Agreement Procedure.
It is also applicable to note that even when an individual became a resident in India due to unusual circumstances, he would most likely become not ordinarily resident in India. Therefore, his foreign-sourced income shall not be taxable in India unless it is acquired from a business managed in or a profession set up in India.
Employment income taxable only subject to circumstances as per DTAA Further, an article related to employment income in the DTAA with different countries governs employment income taxation. For example, Article 16 of the Indo-USA DTAA issues the following for taxation of employment income:
Dependent personal services
Subject- to the provisions of Articles 17 (Directors’ Fees), 18 (income Earned by Entertainers. and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by PrQfissors, Teachers and Research Scholars), salaries, wages and other related remuneration acquired by a resident of a contracting state in respect of fart employment shall be taxable only in that state unless the employment is exertion in the other Contracting State. If employment is an exertion, such remuneration is derived from there may be taxed in that other state.
Despite the provisions of paragraph 1, remuneration obtained by a resident of a contracting state in respect of an employment exertion in the other Contracting State shall be taxable only in the first-mentioned state, if
the beneficiary is present in the other State jr, O a period or periods not in the aggregate 183 days in the relevant taxable year
the salary is paid by, or on behalf of, an employer who is not a resident of the other state
the income is not ensured by a permanent initiation or a fixed foundation, or a trade or business which the employer has in the other state.
Despite the preceding provisions of this article, remuneration obtained in respect of an employment exercised aboard a ship or aircraft running in international traffic by an enterprise of a Contracting State may be taxed in that state.”
The DTAA disseminate the taxation rights between the employee’s jurisdiction of residence and the place where the employment is performed. Salaries, wages and other related remuneration are taxable only when the employee is resident unless the work is performed in the other country. Generally, as per the DTAAs, such other country has taxation rights only if the employee is present in that country for more than 183 days or the employer is a resident of the source authority, or the employer has an indefinite establishment in the source jurisdiction that bears the remuneration. Suppose a USA resident under the employment of a USA corporation has got stranded in India performs a job from India. In that case, its salary will not be taxable in India regardless of he is present in India for 183 days or more during the PY 2020-21 or if the remuneration is borne by the Indian permanent establishment of such a USA corporation.
Credit for the taxes paid in other countries Further, a resident person in India shall be authorised to claim credit of the taxes paid in any other country under rule 128 of the Income-tax Rules, 1962.
International experience The Organisation for Economic Co-operation and Development (OECD) in its OECD Policy Responses to Coronavirus (COVID-19), OECD Secretariat survey of tax deals and the effect of the COVID-19 crisis, edition 3rd April 2020, has provided the following guidance on this matter:
Despite the complication of the rules and their application to a wide range of probably affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position.
Two main situations could be envisaged:
A person is tentatively away from their home (perhaps on holiday, possibly to work a few weeks) and gets stranded in the host country because of the COVID-19 crisis and attains domestic law residence there,
A person is working in a country (the “current home country’) and has obtained residence status there, but they temporarily return to their “previous home country” because of the COVID-19 situation. They may either never have lost their position as a resident of their previous home country under its domestic legislation, or they may recover residence status on their return.
In the first scheme, it is unlikely that the person would acquire residence status in the country where they are temporary because of extraordinary situations. There are, however, rules in domestic legislation considering a person to be a resident if he or she is present in the country for a definite number of days. Still, even if the person becomes a resident under such rules, if a tax treaty is relevant, they would not be a resident of that country for the tax treaty’s purposes. Such a temporary disruption should therefore have no tax implications.
In the second scheme, it is unlikely that the person would regain residence status fin’ temporarily and unusually in the previous home country. Still, even if the person is or becomes a resident under such rules, if tax treaty is relevant, the person would not become a resident of that country under the tax treaty due to such temporary confusion.”
Thus, it has been determined by the OECD that DTAAs contain the necessary provisions to deal with the cases of dual residency emerging due to COVID-19 situations.
Relaxation by other countries A study of the measures taken by distinct countries discovers that there is mix response. Some countries have provided comfort for certain days subject to authorised conditions satisfaction, whereas some of the countries have not offered any relief. For example, the USA has provided relief up to a maximum of 60 days, subject to the satisfaction of certain conditions and furnishing information in the specified form. Similarly, the UK has provided relief of 60 days in exceptional circumstances depending on each case’s fact and events. Also, Australia issued guidelines for allowing ease by examining facts and circumstances. Germany has clarified that there is no factual inequity if the right to tax is displaced from one contracting state to another due to changed facts in the absence of a risk of double taxation.
Thus, it can be seen that OECD, as well as most of the countries, have simplified that in view of the facilities of the domestic income tax law read with the DTAAs, there does not emerge a possibility of the double taxation of the income for FY 2020-21, As explicated above, the case of double taxation does not survive as per the provisions of the Income-tax Act, 1961 read with the DTAAs. However, to understand the possible situations in which a particular taxpayer is facing double taxation due to India’s forced to stay, it would be in the fitness of things to acquire relevant information from such individuals. After understanding the feasible situations of double taxation, the board shall examine that,
whether any relaxation is needed to be provided in this matter; and
If required, then whether general moderation can be provided for a class of individuals or specific leisure must be delivered individually.
Therefore, if any individual is facing double taxation even after considering the relief provided by the respective DTAAs, he may grant the information in Form -NR appropriate by 31st March 2021. This form shall be yield electronically to the Principal Chief Commissioner of Income-tax (International Taxation)
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