Budget 2020: The changes introduced in the residency provisions clearly indicates the government’s focus on widening the tax base and increasing tax revenues by plugging any avenues for tax planning.
Budget 2020 for NRIs: Undoubtedly the most prominent change introduced in this Budget for individual taxpayers is the new optional tax regime wherein the tax slabs have been widened with six progressive tax rates applicable at various income thresholds. The new tax rates are subject to certain conditions including giving up specified deductions and exemptions such as the popular LTA, HRA, deduction for investments under Section 80C, interest on housing loan for self-occupied property, donations, etc.
However, there are some other significant changes proposed by the Finance Bill 2020 which will impact individual taxpayers in many other ways. One such change is the amendment proposed to the ‘Residency’ related provisions under Section 6 of the Income-tax Act, 1961 (Act). The changes assume significance as the residential status of a taxpayer plays a key role in determining the scope of taxable income in India for any given financial year (tax year).
Impact on Indian Citizens / PIOs visiting India
As per the Act, an individual is considered as a ‘Resident’ in India during a tax year, if he meets any of the following criteria:
(a) has been in India for an overall period of 182 days or more in the relevant tax year; or
(b) has been in India for 60 days or more in the relevant tax year and for 365 days or more during four tax years preceding the current tax year.
An individual who does not meet both the above criteria qualifies as a ‘Non-Resident’. The tax laws recognize that Indian citizens or Person of Indian Origin (PIO) who stay outside India often maintain strong ties to India and visit India to take care of their assets, families or for other purposes. Therefore, relaxation is provided to Indian citizens/ PIOs, allowing them to visit India for longer duration, without qualifying as a ‘Resident’ of India Under the existing tax laws, Indian citizens/ PIO visiting India shall qualify as a ‘Resident’ only if they are in India for at least 182 days in the tax year along with 365 days in last four tax years (instead of the 60 + 365 days criteria mentioned under (b) above). Interestingly, this threshold limit was 90 days in the year 1982, which was further raised to 150 days in the year 1989 and finally to 182 days in 1994, to protect the interests of Indian citizens/ PIOs who used to travel a lot to India to manage their investments in India or other economic purposes.
However, the government believes that some individuals misuse the relaxed provisions to avoid qualifying as a ‘Resident’ in India, by managing their period of stay in India as less than the specified limit of 182 days and thereby escaping the payment of tax on their Global income in India, even while they may be carrying out significant economic activities within India. Therefore, in order to curb potential tax loss, the Finance Bill 2020 proposes to reduce the threshold to 120 days in the tax year coupled with 365 days in previous four tax years in order for an Indian citizen/PIO visiting India. This will surely impact non-residents who have extensive business or family ties in India and who typically plan longer visits to India.
Change in criteria for qualifying as ‘Not-Ordinarily Residents’
A resident is further categorized between ‘ordinary resident’ or ‘not-ordinary resident’. It is important to note here that an ‘ordinary resident’ is taxable in India on his global income as against a ‘not-ordinary resident’ whose income from sources outside India is taxable in India only if it is derived from a business controlled in or a profession set up in India.
As per the current tax laws, an individual would qualify as a ‘not-ordinarily resident’ if he has been a ‘Non-Resident’ in India in at-least nine out of the ten previous tax years or has been in India for an overall period of 729 days or less during the seven previous tax years. An individual exceeding these limits would qualify as an ‘ordinary resident’ and therefore be required to pay taxes in India on his global income.
The Finance Bill 2020 has amended the criteria by which a resident may qualify as a ‘not-ordinary resident’. As per the proposed amendment, an individual who has been a ‘Non-Resident’ in India in seven out of ten previous tax years, would qualify as a ‘Not-Ordinarily Resident’ in India.
Moving towards citizenship based taxation
Another issue which the government has taken cognizance of is with respect to individuals who arrange their physical presence in India and abroad in such a manner that they do not qualify as tax residents in any country or jurisdiction during a given tax year. Accordingly, in order to discourage this, a new clause is to be inserted in Section 6 to provide that an Indian citizen, who 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, shall be deemed to be a ‘Resident’ in India. This amendment shall be applicable with effect from financial year 2020-21. However, it is important to note here that even after the proposed amendment, an individual may still not be required to pay any taxes on his income earned outside India, if he qualifies as a ‘Not-Ordinarily Resident’ as discussed above.
To sum up
Residency related provisions have been untouched for many years. Interestingly, the government had in 2019 introduced detailed disclosure requirements in the tax return forms to assess the taxpayer’s residential status in India. Individuals who qualified as ‘ordinary resident’ or as ‘not-ordinary resident’ were required to provide information for their period of stay in India during the tax year and in preceding 10 years.
Non-resident individuals who are Indian Citizens or PIOs were required to disclose their period of stay in India for the tax year and preceding 4 tax years. Non-resident individuals were also required to mention their country of residence, along with their taxpayer identification number in such jurisdiction. The changes introduced in the residency provisions clearly indicates the government’s focus on widening the tax base and increasing tax revenues by plugging any avenues for tax planning. It is, therefore, important for Indian Citizens/ PIOs and also globally mobile employees to carefully evaluate their residential status and assess their tax liability in India accordingly.
(By Akhil Chandna, Director at Grant Thornton India LLP, with inputs from Rajashree Sarna and Rajat Trivedi)