Amendments of ‘Residential Status’ for Assessment Year 2021-22

Indian Citizens if not a ‘Resident’ of any other country  shall be deemed as ‘Resident in India’  [Applicable from Assessment Year 2021-22] 

As residential status of an individual is determined on the  basis of number of days of his stay in India. An individual can  arrange his affairs in such a fashion that he does not become  a tax resident of any country during a particular year. He may  carry out substantial economic activities from India but he can  manage his period of stay in India so as to remain a non-resident  in every country and not required to declare his global income in  India. This arrangement is typically employed by High Net-Worth  Individuals (HNIs) and crew members on ships. 

The current rules governing tax residence make it possible for such  individuals, who may be Indian citizens receiving income sourced  from India, to not pay tax on that income anywhere in the world.  Therefore, it has been proposed by the Finance Bill that an Indian  citizen, who is not a tax resident of any country or jurisdiction,  will be considered to be a tax resident of India.

The condition to substitute ’60 days with 182 days’ is  changed from ’60 days to 120 days’  [Applicable from Assessment Year 2021-22] 

The residential status of an individual is determined by the  number of days of his stay in India. Under the existing Act, an  individual is resident in India in a financial year if: 

1. he is in India for 182 days or more during the year; or

2. he has been in India for 365 days or more during the 4  immediately preceding years and for 60 days or more during  the financial year. 

However, in respect of Indian citizens who leave India during the  relevant financial year for the purpose of employment outside  India or as a member of the crew of an Indian ship, and in respect of Indian citizens as well as persons of Indian origin who  visit India during the year, the period of 60 days as mentioned  in (b) above is read as 182 days.  It has been observed by the authorities that the relaxation given  by substituting the period of 60 days with 182 days is sometimes  misused. Therefore, the Finance Bill proposes that the period  of stay in India should be reduced from 182 days to 120 days.

Condition to become ‘Not-Ordinarily Resident’ partially  relaxed  [Applicable from Assessment Year 2021-22] 

As per Section 6 of the Income-tax Act, a resident individual is  deemed as not-ordinarily resident in India, if he satisfies any of  the following conditions: 

1. He has been a non-resident in India for at least 9 years out of  10 years preceding the previous year; or 

2. He has been in India for 729 days or less during the period of  7 years preceding the previous year. 

The category of ‘resident but not ordinarily resident’ has been  introduced to ensure that a non-resident does not suddenly face  the compliance requirements of a resident, merely because he  spends more than 182 days in India during a particular year.  These conditions specified in the present law have been the  subject matter of disputes. Thus, the Finance Bill proposes to  rationalize these conditions and provides that an individual shall  be deemed to be ‘not ordinarily resident’, if he has been a Non-Resident in any 7 out of the 10 immediately preceding years.  This will also help in avoiding any unintended hardship caused  by the 120-day rule discussed above.

Indian Citizens who are ‘Bona Fide Workers’ :  Clarification regarding Proposal in the Finance Bill 2020

The Finance Bill, 2020 has proposed that an Indian citizen shall  be deemed to be resident in India, if he is not liable to be taxed  in any country or jurisdiction. This is an anti-abuse provision  since it is noticed that some Indian citizens shift their stay in low  or no tax jurisdiction to avoid payment of tax in India. 

The new provision is not intended to include in tax net those  Indian citizens who are bona fide workers in other countries. In  some section of the media the new provision is being interpreted  to create an impression that those Indians who are bona fide  workers in other countries, including in Middle East, and who  are not liable to tax in these countries will be taxed in India on  the income that they have earned there. This interpretation is  not correct.

In order to avoid any misinterpretation, it is clarified that in  case of an Indian citizen who becomes deemed resident  of India under this proposed provision, income earned  outside India by him shall not be taxed in India unless it  is derived from an Indian business or profession. Necessary  clarification, if required, shall be incorporated in the relevant  provision of the law.