The Pandemic induced strict lockdowns and border closures have given rise to anxiety and confusion amongst taxpayers regarding their tax residency position in India. The Indian Government recognizes the restrictions that the Pandemic has imposed on individuals’ movement to and from India. As a result, many people have been forced to spend more time in India than originally anticipated – thereby creating expensive changes in their residency and income tax status.
The Central Board of Direct Taxes (“CBDT”), vide Circular No. 2 of 2021, issued on March 3, 2021 [https://www.incometaxindia.gov.in/communications/circular/residency-circular-02-of-2021.pdf] (“Circular”) attempted to provide relief to individuals who are stranded in India on account of the ongoing travel embargo and who may potentially be subject to double tax in India. The Board has sought information from individuals facing the pressure of double tax owing to their forced stay in India. The clarification sought by way of this Circular was highly anticipated by individuals who have been stranded in India during the financial year (“FY”) 2020-21 and who would qualify as tax residents of India as per Section 6 of the Income-tax Act, 1961 (“IT Act”). However, the Circular does not offer any respite or relief to individuals unlike the Government’s CBDT circular issued in 2020.
The Circular has been issued in light of the Supreme Court (“SC”) order dated February 10, 2021, whereby CBDT was tasked to decide on relief to be granted to individuals within three weeks of receipt of such representation for the FY 2020-21 in the wake of the Pandemic.
The Government by way of a circular issued on May 8, 2020 clarified the residential status of individuals who visited India during the FY 2019-20 and whose stay lasted longer than expected considering the lockdown. The CBDT announced a partial relaxation in determining the residential status of individuals who came to India on a visit prior to March 22, 2020. Their presence in India during the specified period (i.e., from March 22, 2020/ date of quarantine till March 31, 2020/ date of departure before March 31, 2020, as the case may be) was not considered for determining their residential status in India for the FY 2019-20.
Since the travel embargo extended well past March 31, 2020, the CBDT received various representations from individuals requesting a relaxation similar to the one extended by the Government in 2020 for determining the tax residential status for the FY 2020-21. As individuals had intended to leave India after a brief stay in FY 2019-20, the extended stay in this case is force majeure caused by the Pandemic, which would require exceptions.
As of date, India continues with its travel embargo with borders remaining closed for most international travellers/countries till March 31, 2021 (which may be extended).
What did the Circular provide?
Provisions relating to determination of residential status of a person is detailed under Section 6 of the IT Act. The status of an individual, whether a resident in India, non-resident or not ordinarily resident, is dependent on his period of physical stay in India during the previous year or preceding previous years, as the case may be.
The Circular highlights the 182-day residency test stipulated by most countries, which automatically qualifies an individual as a resident of any one tax jurisdiction. Owing to the global nature of the Pandemic, many countries have provided relief / relaxations to the 182-day rule – thereby leading to a possibility of taxpayers enjoying double non-residency, even in a situation where he stays in India for more than 182 days during the FY 2020-21. Tax authorities in the US, the UK, Ireland and Australia have issued guidelines on relaxation of tax laws for individuals impacted by COVID-19.
However, individuals could be considered as a tax resident under the domestic income tax laws of multiple countries, especially in the year they immigrated. Tie-breaker rules are included in the double taxation avoidance agreements (“DTAAs”) to help determine which country has the right to tax an individual as the country of residence in case the individual qualifies as a resident (for tax purposes) under the domestic laws of both countries.
The Circular concluded that the possibility of an individual being subject to double taxation on his income for FY 2020-21 is remote. The conclusion was based on the guidance, provided by the OECD (The Organisation for Economic Co-operation and Development) in conjunction with tax administrations, to address tax issues arising out of the current travel restrictions world over. With a view to reduce the compliance burden, necessary relaxations have been effected to the overall residency rules across the world and this, read with the DTAAs, do not offer much opportunity to the tax payers to escape assessment of their income in any particular tax jurisdiction.
What is the impact on affected taxpayers?
With this Circular, the CBDT has ‘hinted’ that no major relief shall be given vis-a-vis the residency rules for FY 2020-21 and it appears that non-residents would have to continue waiting (for what, we don’t yet know!).
However, where an individual faces double taxation even after taking into account the relief provided by the relevant DTAA, he/she is provided an opportunity to furnish and submit the specified information electronically by March 31, 2021 in Form–NR to the Principal Chief Commissioner of Income tax (International Taxation). Depending on the information submitted, the department shall determine whether any relaxation is required to be provided in this matter; and if required, then whether general relaxation can be provided for a class of individuals or specific relaxation is required to be provided in individual cases.
Hence, the relief (if any) would be provided on a case-by-case basis. We anticipate many such affected taxpayers will begin filing their submissions shortly. We will continue to watch this space, and as and when clarifications and updates are released, will provide suitable updates.