As per Income-Tax Act, based on number of days of stay and other conditions, such stranded employees could qualify as ‘non-resident’ or ‘not ordinarily resident’ in India for FY 2020-21 and thereby taxable in India on India sourced income or income received in India.
By Jagdeep Sadhale
Numerous overseas employees who were in India in March 2020 either for personal or business reasons were unable to go back or went back only after a significant unintended stay due to travel restrictions, during which they continued to render services to their foreign employers from India.
As per Income-Tax Act, based on number of days of stay and other conditions, such stranded employees could qualify as ‘non-resident’ or ‘not ordinarily resident’ in India for FY 2020-21 and thereby taxable in India on India sourced income or income received in India. Some stranded individuals may qualify as ‘ordinarily resident’ and thereby liable to Indian tax on worldwide income unless they break their tax residency to their overseas country under the applicable double taxation avoidance agreement (DTAA).
Short stay exemption
A tax exemption, i.e., ‘short stay exemption’ is available under the Act but only to foreign nationals for stay upto90 days in a year subject to satisfaction of other conditions. For others, including Indian nationals, a short stay exemption is available under DTAA where the individual qualifies as overseas country tax resident and his stay in India does not exceed 183 days. For both exemptions, the foreign employer should not have any business presence in India.
Thus, the stranded employees may be taxable in India in FY 2020-21 in respect of services rendered in India if they are not eligible for short stay exemption. If they qualify as ordinarily resident under the Act and Indian tax resident under the DTAA, they may be taxable in India on their worldwide income and need to report their foreign assets in their Indian tax return.
Further, foreign employers need to evaluate ‘Place of Effective Management (POEM)’ or ‘Business Connection/Permanent Establishment (PE)’ implications in India due to these stranded employees.
For FY 2019-20, the Central Board of Direct Taxes (CBDT) issued a circular excluding unintended stay in March 2020 due to quarantine/travel restrictions while determining a stranded individual’s tax residential status. For FY 2020-21,CBDT in March 2021 issued a circular which said if a stranded individual is taxable in India on account of the unintended stay, then such an individual could seek relief in his home country under the applicable DTAA to prevent double taxation. Additionally, an extremely short window, i.e., till March 31, 2021, was provided for seeking relief in case of double taxation by approaching the CBDT.
Thus, the circular did not provide any blanket exclusion of the forced stay period nor any relief from consequential tax in India. Also, there is no discussion around POEM/PE. The circular has since then been challenged in the Supreme Court (SC) by a Dubai-based individual stranded in India.
In view of the difficulties, will the CBDT take a relook and grant relief? If no relief comes through by September 30, 2021, i.e., the extended due date for individuals for filing ITR for FY 2020-21, the stranded individuals may have to pay taxes and file their tax return before the due date. A tax refund can then be claimed by revising the tax return if relief comes through subsequently.
To sum up, more clarity is required, and the stranded employees and their employers will be hoping for appropriate tax relief from the SC/CBDT.
The writer is tax director, People Advisory Services, EY India. Views expressed are personal