India: CBDT Clarification On Tax Residency – A Scope For New Interpretation

BACKGROUND

As per the OECD Convention Model, 2017 the term resident of a country means any person who, under his native country is liable to tax therein by reason of his domicile, residence or place of effective management. Due to COVID-19, if an individual is present in a jurisdiction for a considerable amount of time, it may raise questions regarding the change of the individual's place of residence.

In India, individuals are classified as resident & non-resident under Section 6 of the Income Tax Act, 1961 on the basis of the duration of their stay in the country during the financial year. The threshold for this stay was 182 days which was revised by amendment in Finance Act, 2020 to 120 days.

The Central Board of Direct Taxes (CBDT) vide Circular no. 11 of 2020 dated 08.05.2020 has issued clarifications regarding the determination of tax residency of the NRIs and foreigners who are stranded in India due to current pandemic situation, as per Section 6 of the Income Tax Act, 1961 for previous year 2019-2020.

CLARIFICATION OR CONFUSION?

The circular states that an individual who visited India on a visit before 22.03.2020, and has been unable to leave India on or before 31.03.2020, his/her period of stay in India from 22.03.2020 to 31.03.2020 would not be taken into account for determination of tax residential status.

In cases where a person has been quarantined in India due to Covid-19 on or after 01.03.2020 and has departed on an evacuation flight on or before 31.03.2020 or has been unable to leave India on or before 31.03.2020, the period of his stay from the start of his/her quarantine to the date of his/her departure would not be taken into account for the determination of the tax residential status.

The circular issued by CBDT also carries some aspects, which are unclear and are subject to further clarifications. The correct meaning of words like "On visit" or "Quarantine" would be subject to interpretation.

Most of the people might take the shelter of Clause 'b' of the circular as it excludes the period up to 31.03.2020. It reads as,

There is still confusion as to whether it would also include the people who preferred to be self-quarantined or this clause will be only applicable for the people who are quarantined by the Indian government.

CONCLUSION

The circular may act as a big relief for NRIs and non-residents who arrived in India before 22nd March, 2020 and could not return due to Covid-19 but there is still a need for some clarity with regards to certain provisions introduced.

Since the relief has been provided for the year 2019-20, it would be interesting to see if a follow-up circular is issued for the year 2020-21.

Many countries like US, UK, Ireland, Singapore, Australia, etc have already issued various guidelines, providing relief in determining tax residency status for the individuals, companies and cross border workers.

It is expected from the Indian government as well to declare specific guidelines on determining the Permanent Establishments and Corporate Tax Residency which will be bring a sigh of relief for foreign companies and NRIs during such difficult times.

This content is purely an academic analysis under "Legal intelligence series".

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