Deemed residency introduced in India for citizens

Determining residential status in India

In India, till 2019-20, i.e. period ending 31 March 2020, the residential status of an individual was determined on the basis of his or her physical presence in India. An individual was considered as a tax resident for a tax year (1 April to 31 March) if either of the two basic conditions were met.

· Individual’s presence in India during the tax year was 182 days or more; or

· If the individual’s presence in India during the tax year was 60 days or more combined with presence in India for 365 days or more in preceding four tax years.

An individual qualified as a non-resident if none of the above two basic conditions were met.

However, in case of Indian citizens and persons of Indian origin (PIO) who are outside India, the government recognized that they may need to visit India for a longer duration to manage their personal and financial matters and the 60-day threshold may not suffice.

Accordingly, a relaxation in the 60-day threshold was provided to such individuals and the 60-day threshold in the second basic condition was replaced with 182 days. This helped Indian citizens and PIOs to visit India for longer durations to manage their affairs and still maintain their non-resident status.

Once an individual qualifies as a resident, it is further determined if the individual is an ‘ordinary resident’ or a ‘not ordinary resident’ (NOR). This is based on another set of conditions wherein the residential status/physical presence in India in the preceding tax years is to be seen. Broadly, an individual qualified as a NOR if:

· the individual has been a non-resident for nine out of previous 10 tax years; or

· the individual’s presence in India in the last seven tax years is 729 days or less.

Taxability in India based on residential status

The residential status of an individual assumes importance as the taxability of income in India is based on the individual’s residential status. An ordinary resident is taxable in India on his/her global income, i.e. income from all sources whether in India or outside India and whether such income is received in India or overseas. The scope of taxable income of a NOR is narrower, as he/she is taxable in India on India-sourced income or income which is received/deemed to be received in India. Additionally, a NOR is also taxable in India with respect to income from sources outside India if such income is derived from a business controlled in India or a profession set up in India.

In case of a non-resident, the taxability in India is only with respect to India-sourced income or income which is received or deemed to be received in India.

Cases of double non-taxation

Over the years, the increasing mobility of individuals resulted in situations where some individuals did not qualify as tax residents in any jurisdiction and therefore, it was perceived by the government that this led to certain income escaping the tax net both in India and overseas. This was due to the fact that individuals could arrange their physical presence in such a way that the individual qualified as a non-resident in his home country as well as overseas. Further, with technological advancements, it is now possible to manage one’s business or professional affairs to a great extent from any location remotely, vis-à-vis earlier where physical presence at a particular location was necessary. Such arrangements also allowed individuals to benefit from lower or nil tax rates in certain jurisdictions.

Change in residency provisions from tax year 2020-21

With an objective to bring such individuals who are Indian citizens or PIOs within the fold of taxation, the government of India has amended the provisions related to residential status. The new rules are applicable from tax year 2020-21, i.e. from the period beginning on 1 April 2020.

The rules have been amended for (i) Indian citizens or PIOs visiting India during the year and for (ii) Indian citizens who may not visit India at all during the tax year.

* New provisions for Indian citizens/ PIOs visiting India

As per the amended rules, where an Indian citizen or PIO’s total income in India during the tax year is above `15 lakh, the relaxation in number of days to visit India and maintain their non-resident status is reduced to 120 days (as against 182 days earlier). Thus, where such an individual is present in India between 120 to 182 days, such an individual would now qualify as NOR as against being classified as non-residents earlier.

* Deemed residency for Indian citizens

The other important amendment is with respect to citizens of India who are not liable to tax in any other country or territory by reason of their domicile, residence, or any such criteria. Where such Indian citizen has total income, other than income from foreign sources, above `15 lakh during the tax year, he/she will now be deemed to be resident of India. For the purpose of determining total income, income from foreign sources means income which accrues or arises outside India, except income derived from a business controlled in or a profession set up in India. Such individuals would qualify as deemed residents irrespective of the physical presence in India during the tax year. It has been clarified that such deemed residents will be treated as NORs in India and not as ordinary residents.

Introducing citizenship-based taxation in India is in line with India’s intent to increase its tax base and limit tax avoidance due to careful planning of physical stay in India v/s overseas.

Implication of change in residency provisions

The moot question that arises is how do these changes impact Indian citizens or PIOs who qualify as NORs in India. As discussed earlier, an NOR is taxable in India with respect to income from sources outside India if such income is derived from a business controlled in India or a profession set up in India. However, a non-resident is not taxable in India with respect to such income from sources outside India.

Accordingly, where Indian citizens who qualify as deemed residents or Indian citizens/ PIOs visiting India who qualify as NORs and who have income in foreign jurisdictions from business controlled in India or profession set up in India, would now need to determine such income and offer it to tax in India, if the specified conditions are met. Whether a business is considered as being controlled from India would, in turn, depend on factors such as where are the key managerial personnel located, jurisdiction of holding company, etc.

Also, where taxability arises in India due to change in residential status, tax compliances like payment of advance tax, filing of tax return, etc follow. It is important to note that non-compliance with tax laws can result in interest, penalties and even prosecution in certain cases.

Therefore, it is advisable that Indian citizens and PIOs take cognizance of these changes and determine their taxability and related compliance obligations in India.

Rajashree Sarna contributed to this article.

Vikas Vasal is national leader-tax at Grant Thornton in India.