COVID-19: Does prolonged, involuntary presence in India by mobile employees impact personal tax compliance?

May 28, 2020 10:22 AM

The residency rules in India are complex and applicability of rules in case of each individual would be different based on their fact pattern.

income tax, residency rules, residency rules in India, COVID-19, lockdown, residential status, NRI, relaxation in tax residency normsThe involuntary presence in India due to COVID-19 can affect the personal tax situation of individuals.

The Corona virus disease 2019 (COVID-19) has been declared a global pandemic by the World Health Organisation. Apart from the tragic health impact on those afflicted, the pandemic has also affected the daily lives of people all over the world. Due to lockdowns implemented in various parts of the globe, the world economy is under stress. People are stranded at various locations on account of travel restrictions. The governments of various countries have been focusing on safety and the well-being of people and various forms of economic stimulus packages have been announced to mitigate the impact on weaker sections of society.

The involuntary presence in India due to COVID-19 can affect the personal tax situation of individuals. This is because, as per Indian laws, the income tax due in India of an individual depends on the taxable scope of income, which in turn depends on residential status (RS). The physical presence in India is the basis for determining RS in India. Due to change in RS, an individual may become liable to tax in India not only from sources of income in India but also from sources outside India. Additional reporting requirements in India may also apply.

To address the above issue, the Indian government recently announced certain relaxations in tax residency norms for the Financial Year ‘FY’ 2019-20. The relief addresses the hardship of individuals who came to India on a visit before 22 March 2020 for a particular duration and had intention to leave before end of FY 2019-20. In such cases, while determining RS for FY 2019-20, the days an individual was present in India would be excluded as below:

In the said circular, a reference is made to exclude days for an individual who came on a visit to India on or before 22 March 2020. The term ‘visit” has not been defined.

Revenue authorities should apply a broad interpretation of the term ‘visit’ to cover different scenarios under which taxpayers may be stranded in India, considering the intention is to avoid hardships to such individuals.

Further, there is no clarity whether these days of involuntary presence in India should be excluded in the subsequent tax years while evaluating the cumulative presence of 365 days (in previous 4 FYs) / 729 days (in previous 7 FYs), for determining RS. As individuals are present in India due to reasons beyond their control, it would be logical to assume that such days should be excluded. Revenue authorities, to avoid any scope for litigation on this aspect, should issue necessary clarification.

The involuntary presence will also affect such individuals for the new FY, which has commenced on 1 April 2020. The Revenue authorities have indicated that norms for FY 2020-21 will be relaxed on resumption of international flights (based on the relevant dates).

The residency rules in India are complex and applicability of rules in case of each individual would be different based on their fact pattern.

Despite the above relaxation, it is advisable that employees need to be mindful of the presence due to their involuntary stay in India while determining their RS and carefully plan their subsequent travel to India. The employers of such employees also need to consider the above points from the perspective of their withholding tax compliance obligations.

(By Alok Agrawal, Partner, Deloitte India; and Sangeeta Mehta, Manager with Deloitte Haskins and Sells LLP)

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