Direct Tax update on relaxation of forced stay in India for non-residents – CBDT Circular 11 of 2020

Resident or Non-Resident? 

An Individual is treated as a tax Resident in India if he is in India for more than 182 days in the current previous year or if he is in India for 60 days or more in the current previous year and 365 days in the preceding four previous years. 

It is to be noted that the limit of 60 days was relaxed to 182 days where an Indian citizen comes on a visit to India, where the Indian citizen leaves India for the purpose of employment or is a member of an Indian ship as defined under the Merchant Shipping Act, 1958. 

Ordinary or Not ordinarily resident? 

Ordinarily, an Individual is treated as a ‘Not Ordinarily Resident’ (NOR) if he has been a Non-resident in 9 out of 10 preceding previous years or has stayed in India for a period less than 729 days during the preceding 7 previous years. 

The Finance Act, 2020 (Act) has radically changed the above, in as much as it provides that the 60 days’ limit mentioned above would be replaced by 120 days for an Indian citizen or a person of Indian origin where the Indian Income is in excess of INR 15 lakhs. It is clarified that such an individual would be treated as a NOR. 

Separately, the Act also provides that an Indian citizen having Indian income in excess of INR 15 lakhs shall be deemed to be an Indian resident if he is not liable to tax in any other country or territory by reason of his domicile or residence. Having said that, such a stateless individual would also be treated as a NOR even without being physically being present in India for a single day. 

Shout-out to NRIs – Update on CBDT Circular 11 of 2020 dated 8 May 2020 

Due to the outbreak of Novel coronavirus, Government of India had announced a nationwide lockdown with effect from 25 March 2020. Consequently, all means of public transport were in abeyance with immediate effect which led to several non-residents being stranded in India.

Such stranded non-residents were staring at the risk of being treated as a Resident due to their unanticipated extended stay in India which would have consequently led to taxation of their global income in India. 

Thus, in light of this genuine hardship faced by Non-residents, the Central Board of Direct Taxes (CBDT) has recently come out with Circular no. 11 of 2020 dated 8 May 2020 to provide relief to such affected persons by stating that the period from 22 March 2020 to 31 March 2020 shall be ignored for the purpose of counting the number of days for determining the residential status under section 6 of the Income Tax Act, 1961 for the assessment year 2020-21.

Also, such persons who were on quarantine in India on account of Coronavirus on or after 1 March 2020 and have departed in an evacuation flight on or before 31 March 2020 or who are unable to leave India on or before 31 March 2020, then such period of stay in India as applicable shall also be ignored. 

Further, where a person has departed on an evacuation flight on or before 31 March 2020, then the period from 21 March 2020 to 31 March 2020 shall also be ignored. 

Comments: 

While this timely clarification by CBDT is a welcome move which brings many tumults to rest, specific clarification for persons who were never under quarantine and are still stranded in India before announcement of lockdown up to a date post April 2020 (i.e. AY 2021-22) stands awaited. 

Interestingly, one would also need to consider the risk of Place of Effective Management (POEM) of a foreign company being regarded as in India. In a case where a foreign company’s bonafide key management and commercial decisions were ordinarily taken from outside India, but may now be taken from India where such decision makers have returned to India due to the outbreak of coronavirus. Specific clarification on the same stands awaited, as the circular covers effect of residential status due to forced stay for individuals, and its effect on the status for corporates is not covered by the same. 

Organization of Economic Cooperation and Development has provided guidance that the ‘ordinary’ and the ‘usual’ place where key management and commercial decisions are taken for conducting business has to be considered for determining POEM. Accordingly, temporary shifting of physical presence of persons taking decisions during the coronavirus crisis should in my view not have a bearing on the determination of POEM in India. However, a necessary clarification by the tax authorities in this regard would be welcome. 

Further, where Permanent Establishment (PE) is dependent upon the number of days stayed in India (such as Service PE, Construction PE etc.), a specific clarification is awaited from the tax authorities to confirm that the period during which India is under lockdown has to be excluded, as no work per se would have been carried out during the extended stay and hence there is justification to exclude such forced stay. 

 

Disclaimer: The views mentioned herein are personal and application of the same should be made in consultation with a professional depending upon facts and circumstances of each case.

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Contributing Advisors