Crisis prompts govt to rejig tax residence norms for FY213 min read . Updated: 03 Aug 2020, 07:21 AM IST
- This will provide relief to NRIs, foreigners who couldn’t leave India due to flight restrictions
- A person who stays in India for 182 days in a year becomes an Indian resident for tax purpose
NEW DELHI : The coronavirus crisis which has halted international air travel is prompting India to rewrite its tax residence rules, providing relief to non-resident Indians (NRIs) and foreigners unable to leave the country. Under India’s tax rules, individuals living in the country beyond specific time periods become liable to pay tax in India.
The finance ministry had earlier given a relief, excluding quarantine period and covid-related extended stay from tax residence calculations for FY20, but the surge in infections is set to result in an overhaul of the rules for the current fiscal year.
As per existing rules, a person who stays in India for six months (182 days) in a year becomes an Indian resident for tax purposes. Since India suspended international air travel on 22 March, any person who was in India as on 1 April would complete the six months stay in India on 29 September, and risks being treated as Indian resident for tax purposes.
The law also prescribes another set of circumstances in which a person can be attributed Indian domicile for tax purposes— 365 days of stay in four preceding years and 60 days of stay in the tax year. For NRIs, there is a relaxation in this case and the window of stay is 182 days in the tax year and from FY20, it is 120 days if the income from India is more than ₹15 lakh. Residents’ global income gets taxed in India while non-residents only have to pay taxes on their India income.
The continued suspension of regular international air travel has made it impossible for NRIs to comply with rules and avoid Indian residence for tax purposes. Aviation regulator the Director General of Civil Aviation on Friday extended the suspension of normal air travel by another month till end of August, even as coronavirus cases crossed 1.7 million in the country.
Extending the travel restriction could have a huge income-tax exposure on these individuals, said Sandeep Jhunjhunwala, partner at Nangia Andersen LLP, a consultancy. Apart from Indian citizens or individuals of Indian origin, international travellers to India are vastly diversified and includes businessmen and employees visiting for meetings, sportsmen, artists, teachers, students and international tourists. “To ease the challenge these international travellers could face and avoid undue hardship, there is an urgent need for revised residency guidelines," said Jhunjhunwala.
To be sure, the Central Board of Direct Taxes (CBDT) had in May assured that once international air travel normalizes, it will issue a circular excluding the period of stay of these individuals up to the date of normalization of international flight operations for deciding their residential status. But considering the fact that tax residence has been an area of disputes and the potential of any relaxation for abuse, it remains to be seen what form the relief will take.
“In a year where revenue collections have been severely impacted, the effort of the government may be to strike a balance between offering relief in genuine cases and to provide for checks on any potential abuse of the relaxation," said Sonu Iyer, tax partner and national leader-people advisory services, EY India.
India has recently struck bilateral arrangements with select countries such as France, Germany and the US, for opening up international air travel in a limited way. It is likely the government may wait for more clarity on how the coronavirus pandemic situation evolves and when international travel stabilises before any new norms are announced, Iyer added.
Another area the government needs to clarify is whether an extended presence of expats in India would constitute a permanent establishment (PE) for foreign corporations in India, added Jhunjhunwala. Local presence of a foreign corporation, which is not in the form of a subsidiary and to which profit is attributable, is called a PE — a major area of tax litigation.