Inability to travel outside India has created uncertainty for individuals and their employers with specific reference to their residential status, tax positions and reporting obligations.
Amid a worldwide lockdown to prevent the spread of COVID-19, the Directorate General of Civil Aviation (India) (DGCA) suspended all international commercial passenger flights from 19 March 2020.
This closure by India and similar measures undertaken by other countries have restricted the ability of individuals to travel. Inability to travel outside India has created uncertainty for individuals and their employers with specific reference to their residential status, tax positions and reporting obligations.
The scope of income that may be subject to tax in India for individuals is dependent upon their residential status in India. The residential status of an individual is determined on the basis of the period of stay in India for each financial year. An individual would qualify to be resident in India during a financial year, if any one of the following conditions are satisfied:
a) Stay in India is 182 days or more during the financial year; or
b) Stay in India is 60 days or more during the financial year and 365 days or more within 4 years preceding that financial year.
If none of the above conditions are satisfied, an individual qualifies as non-resident (NR).
As per the relaxation to the test of ‘Residence’, an Indian citizen and person of India origin (PIO) could visit India for 181 days in a financial year and still qualify as a NR for tax purposes. Further, benefit is also available to an Indian citizen who leaves India in any financial year as a member of the crew of an Indian ship or for the purposes of employment outside India, wherein the period of 60 days is extended to 181 days.
If an individual qualifies as a “Resident” during a relevant FY, he is further classified as a resident but ordinary resident (ROR) or resident but not ordinary resident (RNOR). An individual is said to be ‘RNOR’ in India in any FY, if such person satisfies the following conditions; if not, the person is a resident but ordinary resident (ROR):
(a) Has been a NR in India in 9 out of the 10 FYs preceding that FY, or
(b) Has during the 7 FYs preceding that FY, been in India for a period of or periods amounting in all to, 729 days or less.
The worldwide income of an ROR is subject to tax in India. However, only India-source income or income received or deemed to have been received in India of an RNOR or NR, is taxable in India.
Let us apply the above income-tax law before and after the COVID-19 worldwide lockdown to the following illustrations.
Mr. A, an expatriate (foreign citizen) visits India for the first time on an employment visa on 24 September 2019. He was scheduled to return to his home country on 22 March 2020. Residential status of Mr. A and taxability would be as under:
In a situation where the remuneration of Mr. A was paid by his offshore employer and other conditions were satisfied, his remuneration for services rendered in India would not be taxable in India if his stay in India did not exceed 60 days (applying the provision of the Income-tax Act) and 182 days (applying the provisions of most tax treaties that India has entered into).
Mr. B, a PIO, visits India for managing investments on 24 September 2019. He was scheduled to leave for his home country on 22 March 2020. Mr. B has been a resident in India in 2 out of the 10 FYs preceding FY 2019-20. Residential status of Mr. B and taxability would be as under:
As can be seen from above illustrations (amongst other situations), global income may be subject to tax in India, since they will not be able to exit from India as planned.
The Indian law for determining the residential status is strictly dependent only upon the number of days an individual is in India and no concession is currently provided for situations of force majeure such as the pandemic COVID-19.
The Ministry of Finance, in particular the Hon’ble Finance Minister, has been kind enough to announce several measures to help individuals / taxpayers / industry and several sections of the society. The government may consider providing relaxation in relation to this aspect as well. As an illustration: Stay in India as a consequence of a force majeure event as referred to above, will be excluded while counting the number of days the individual has been present in India. As an alternative, the government may consider indicating that where an individual was supposed to leave India during the suspension period say, starting 19 March 2020, the same may be excluded from the count of number of days in India.
As an illustration, relief has been provided by certain governments in relation to the determination of residential status for individuals.
In the absence of any relaxations, taxpayers will have to present their case before revenue authorities and request for exclusion of the presence in India on account of the force majeure situation.
For the above mentioned situation, the government should come forward with certain relaxations such that there is no change of tax obligations in India for individuals, who would have ordinarily qualified as non-residents, but for the COVID-19 pandemic.
(By Vijay Dhingra, Partner; Urvashi Agarwal, Deputy Manager; and Zeny Gala, Assistant Manager, with Deloitte Haskins and Sells LLP)