Due to the coronavirus outbreak and subsequent lockdown last year (2020), many non-residents were stuck in India due to the stringent travel restrictions
Income Tax for non-residents: Due to the coronavirus outbreak and subsequent lockdown last year (2020), many non-residents were stuck in India due to the stringent travel restrictions.
The CBDT had issued a circular (No. 11 of 2020) to provide relief to such non-resident individuals who came to India on a visit before 22 March 2020 and that circular was w.r.t. Financial Year (FY) 2019-20.
CBDT recently issued a new circular (No. 2 of 2021), providing further guidance on the determination of the residential status of such individuals, whose movement was restricted due to Covid related restrictions.
The circular elaborates the broad provisions of the Income Tax Act and also the DTAAs, wherein the provisions are flexible to provide individuals relaxations w.r.t. their number of days stay and the resulting issue of residency.
What is this circular about? And what are its implications?
The new circular has elaborated the broad provisions of the Income Tax Act (‘IT Act’) and also the DTAAs, wherein the provisions are flexible to provide individuals relaxations with respect to their number of days stay and the resulting issue of residency.
“Some of the provisions elaborated in the CBDT circular include the provisions of section 6 under the Income Tax Act, Tie-breaker rule under the DTAAs, relaxation under Article 16 (OECD mode) for Dependent personal services, etc.
However, if any individual is still facing dual residency/double taxation even after taking into consideration the relief provided by the respective DTAAs, then he/she may furnish the information in Form NR by 31 March 2021 to the Principal Chief Commissioner of Income-tax (International Taxation) who in turn, will examine the situation and provide specific/general relaxation, if required,”
The implication of the recent circular is that the determination of the residential status in case if the same is not resolved based on the guidance in the CBDT circular no. 2 of 2021, would be required to be done by that specific individual in Form NR i.e. case-by-case application need to be done.
Does the recent circular provide any kind of benefit to NRIs?
The recent circular does not provide any specific relief to the Non-residents.
However, it does guide on the available provisions and relaxations under the Income Tax Act and the DTAAs. It may not directly benefit any category of taxpayers, though it provides a taxpayer, who is not sure of his residency about the option of making an application in Form NR,
What individuals still facing dual residency/double taxation should do?
Such individuals may explore the option of making an application in Form Non-Resident. Other key points from the circular that a taxpayer should know Following are some other key provisions of the circular explained by Dr. Surana in conversation with FE Online
a. Recourse to Tie-breaker test in case of dual residency issues:
In case of dual residency, a tie-breaker rule as per relevant DTAA can be applied i.e. an individual will be a resident of the country in which:
- He has a permanent home
- His personal and economic relations (center of vital interests) are closer
- He has a habitual abode
- He is a national
b. Employment income taxable only subject to conditions as per DTAA
The article contained in relevant DTAA about dependent personal services governs the taxation of employment income. The DTAA distributes the taxation rights between the employee’s jurisdiction of residence and the place where the employment is exercised.
The article related to dependent personal services is more or less similar in most of the DTAAs.
Article 16 of the Indo-USA DTAA provides that salaries, wages, and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.
If the employment is exercised in the other Contracting State, then its remuneration will be taxable in that other Contracting State only under the following situations:
- the recipient is present in India for 183 days or more during the relevant taxable year or
- if the salary is borne by a permanent establishment of such employer in the other state or
- the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State
Accordingly, if a USA resident underemployment of a USA corporation has got stranded in India and performs employment from India, its salary will not be taxable in India unless he is present in India for 183 days or more during the financial year 2020-21 or if the salary is borne by Indian permanent establishment of such USA corporation.
c. Relief by Other Countries & OECD Guidance on COVID -19 Crisis
The Circular also provides a reference to the measures or steps taken by other countries in order to provide relief to the taxpayers with respect to the issue of double taxation. Similarly, it has also referred to the OECD policy response guidance to COVID -19 crisis issued by OECD Secretariat. The OECD Guidance with respect to the change of the residence status of individuals provides as follows:
- With respect to a situation where a person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country say India by reason of the COVID-19 crisis, and attains domestic law residence in India, the OECD has clarified that if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty and such a temporary dislocation should therefore have no tax implications.
- The second case could be where a person is working in a home country say, UK, and has acquired residence status there, but they temporarily return to their “previous home country” say, India because of the COVID-19 situation. In such a case, they may either never have lost their status as residents of their previous home country under its domestic legislation, or they may regain residence status on their return. But even if the person is or becomes a resident temporarily and exceptionally in the previous home country under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation
The CBDT Circular takes into consideration that even the OECD has recognized that DTAAs contain the necessary provisions to deal with the cases of dual residency arising due to COVID-19 situations and accordingly the tie-breaker rules as mentioned in the DTAA would apply in such case.