Due to Pandemic, all individuals were stuck in some or other countries. Post revocation of lockdown also, various NRIs came to India for a temporary period and could not return due to suspension of international flights. Unplanned variation in period of stay in India changed the residential status of many NRIs for FY 2020-21 and therefore, affecting there taxability of their income under Income Tax Act, 1961.
CBDT via circular has explained following issues for FY 2020-21
- How to determine residential status of NRIs.
- How income would be taxable in India in case of changing residential status of NRIs.
- How TIE Breaker rule of DTAA would play important role to avoid double taxation.
- In which country income would be tax for FY 2020-21 due to covid – 19.
Therefore, various representations were filed with the Central Board of Direct Taxes (“CBDT”) to clarify on the manner of determination of residential status for FY 2020-21. Considering the same, CBDT issued the clarification vide Circular No. 2/2021 dated 3rd March, 2021.
1. Relaxation in Residential status of NRIs for previous year 2019-20
Due to COVID-19 Pandemic, people who came to India before 22nd March 2020, have to overstay in India because of suspension of International flights. Therefore, to avoid any hardship, CBDT issued circular No. 11/2020 dated 8th May 2020 to clarify following points with respect to residential status of NRIs and foreigners who came to India on a visit before 22nd March, 2020 and:
- Who could not leave India before 31st March 2020 then their stay between 22nd March, 2020 and 31st March, 2020 shall not be counted in determining the residential status of FY 2019-20, or
- Has been quarantined in India because of the Novel CoronaVirus (COVID-19) and could not leave India or has departed in evacuation flight before 31st March 2020. In such a case, his period of stay from the date of quarantine till the date of his departure or 31st March 2020, shall not be taken into account; or
- Who had departed on an evacuation flight before 31st March 2020, his period of stay from 22nd March 2020 to his date of departure shall not be taken into account.
2. Relaxation in Residential status of NRIs for previous year 2020-21
Vide Circular No. 2/2021 dated 3rd March, 2021, CBDT has clarified that how extra stay will not change residential status of an Individual and in case of change in residential status, how there is not going to be any double taxation. Following are the various points clarified:
2.1 In case of general condition of 182 days, no possibilities of dual residency
In most of the countries, the stay period is 182 days or more to become a resident of that country. As a year has 365 days, therefore, generally a person can become resident in only one country.
However, If any relaxation is provided by Indian Government for the stay period of 182 days to determine residential status then there may be cases of double non-residency i.e., a person may end up being non-resident in both the countries and may not become a tax resident in any country for PY 2020-21 even after staying for 182 days or more and therefore, he will not pay tax in any country.
E.g. Any person has stayed in India for 260 days during FY 2020-21 and has stayed in USA for 105 days. Considering general period of 182 days are applicable in USA to obtain residency the shall person shall not become resident in USA for FY 2020-21. Further, if Indian government also provide any relaxation in period of stay for FY 2020-21 then such person may also become non-resident in India. Therefore, he may end up being non-resident in both the countries.
2.2 Applicability of “Tiebreaker rule” of DTAA in case dual residency for Previous year 2020-21
In general conditions of 182 days, a person may not become resident in two countries simultaneously. However, in case residency is determined as per other provisions, i.e., less than 182 days, then a person may become a resident of 2 countries.
To deal with this situation, “Tiebreaker rule” of the Double Taxation Avoidance Agreement (DTAA) shall apply. E.g., as per Article 4(2) of Indo-USA DTAA:
- In case of double residency, A person shall be considered to be the resident of the country where he has permanent residence; or
- If no permanent residence is available then country his personal and economic relations are closer; or
- If none of the above points are determinable then country in which he has habitual abode; or
- If country of his habitual abode is also not determinable then country of which he is a national; or
- If none of the above points helps then competent authorities of the countries will settle the question through mutual agreement.
Thus, even if a person qualifies to be resident of both the countries still “Tiebreaker rule” of DTAA will make him resident of only one country. As per “Tiebreaker Rule”, a person can become resident of two countries only in the following case:
- He has a permanent home available to him in both countries or in none of the two countries; and
- Center of vital interests cannot be determined; and
- He has a habitual abode in both States or in neither of them; and
- He is a national of both States or of neither of them.
Even in such situations, he shall be considered to be a resident of the country as mutually agreed by competent authority.
Therefore, if a person becomes resident in India due to his excessive stay during FY 2020-21, he would most likely become not ordinarily resident in India. Therefore, his foreign sourced income shall not be taxable in India unless it is derived from business controlled in or profession set up in India.
2.3 Income tax on Employment income of NRIs for FY 2020-21
If a NRI is earning employment income then his income shall be taxable as per DTAA. E.g., A person is deriving salary Income from India and Salary Income from USA during F.Y. 2020-21 and he qualifies as resident of India for such Financial year then as per Article 16 of the Indo-USA DTAA, following are the taxation provisions for employment income:
- If a person is resident in a country and salary income is derived from that country then such income shall be taxable in that country itself. Therefore, in given case, Salary Income from India shall be taxable in India itself.
- However, if employment is exercised in other country then such salary income shall become taxable in other country. Therefore, in a given case, Income derived from the USA shall be taxable in the USA itself.
- However, salary derived from USA shall be taxable in India if all following conditions are satisfied:
- If person was present in USA during FY 2020-21 for a period not exceeding 183 days;
- Remuneration is paid by the employer who is not resident of USA; and
- Remuneration is not borne by a Permanent establishment of the employer located in the USA.
Accordingly, salary with respect to employment carried out in the USA shall become taxable in the USA only if a person was present in the USA for more than 183 days during FY 2020-21 or remuneration is paid by the employer who is resident of the USA or remuneration is borne by Permanent establishment of the USA.
Therefore, if a person is carrying out employment in another country and he has stayed in India during FY 2020-21 for more than 182 days and he is qualified as resident of India under Income Tax act then his salary income shall become taxable in his country of employment if such salary is paid by resident of such other country or PE of such other country.
2.4 Credit for the Income taxes paid in other country
If any circumstances, a NRI is liable to pay tax in India on income earned outside India and he has paid taxes on such income in such other country then he shall be entitled to claim credit of taxes paid in any other country in accordance with the Rule 128 of the Income-tax Rules, 1962.
3. OECD clarification for residential status between two countries for FY 2020-21
OECD issued OECD Policy responses to COVID-19 wherein it has clarified that despite the complexity of the rules, COVID-19 will not affect the residence position.
Further, in extreme cases, two main possible situations can be imagined by OECD:
3.1 A person is temporarily away from their home country (either on holiday or due to some work) and such person gets stranded in the host country due to COVID-I9 crisis. Due to his residence period, he attains residential status in such another country.
In the this scenario, there are least chances that a person will acquire residential status in such another country because of extraordinary conditions such as checking residential status of earlier years also. However, he may still acquire residential status because certain countries consider a person resident if he or she is present in the country/or a certain number of days.
However, even if the person becomes a resident and there is tax treaty available between India and such other country then the person would not be considered as resident of that country. Therefore, such temporary dislocation will have no tax implications.
3.2 A person is working in a country and has acquired residence status there but he temporarily returns to his home country because of the COV1D-19 situation. Such a person may acquire residential status in both the countries, i.e., in the current country and in the home country.
In the second scenario, there are again least chances that the person would again acquire residence status in his home country. But even if he acquires residential status and there is a tax treaty formed between India and such other country then the person will not become resident of his country due to temporary dislocation. “
Thus, it has been recognised by the OECD that DTAAs contain the necessary provisions to deal with the cases of dual residency arising due to COVID-19 situations.
4. Relief by other countries for residential status of any NRI in there countries
To deal with residential status issues arising due to COVID-19, different countries have adopted different approaches. Some countries have provided relief for a certain number of days subject to certain conditions and on the other hand, certain countries have not provided any relief.
E.g., the USA has provided relief up to a maximum of 60 days subject to the satisfaction of certain conditions, the UK has provided relief of 60 days in exceptional circumstances. Australia has decided to allow relief by examining facts and circumstances.
Thus, OECD and most of the countries have clarified that as per domestic income tax provisions read with DTAAs, there does not appear a possibility of the double taxation for FY 2020-21.
Similarly, as discussed above, the possibility of double taxation does not exist as per the provisions of the Income-tax Act, 1961 read with the DTAAs.
However, to understand the possible situations in which double taxation may arise due to the forced stay in India, CBDT has decided to collect such information by such affected persons. After understanding the possible situations of double taxation, the Board shall examine that, –
- 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.
Therefore, if any individual is facing double taxation even after taking into consideration the relief provided by the respective DTAAs, he may furnish the information in Form -NR provided in this circular itself.