Many non-resident Indians (NRIs) came to India just as COVID-19 had started to spread last year, and were forced to stay back for longer periods. They have now been given some relief from the Government of India on taxation. However, the government has merely stressed upon its existing tax rules and what their implications would be in the existing circumstances. This gives clarity to how NRI’s residency status will now be accounted for.
The relief given by the tax department so far
If you haven’t in India for 182 days or more in a single financial year, you are considered an NRI. In that case, you pay taxes in your resident country. You only pay taxes in India on income that accrues from India. But you might have to disclose international income in some cases.
The problem was for those NRIs who came to India around March 2020 (towards the end of 2019-20) and got stuck here due to the lockdown situation. Here, the government had relaxed norms earlier. It had said that if you had come to India during March 2020, but had been unable to leave before March 31,2020 or left India on or before March 31, 2020, then all the days spent in India between March 1-31, 2020 would not be counted for NRI status.
The above and earlier clarifications that the Central Board of Direct Taxes had issued in May 2020 were important because India’s financial year ends on March 31. Since the pandemic started towards the end of the previous financial year (2019-20), it would have been impossible for a NRI to re-work his visits to India for ensuring he still remains an NRI if he were indeed working abroad. But many NRIs were quarantined in India or were unable to leave India. This not only had repercussions on how their income would be assessed in 2019-20, but also their NRI status in subsequent years.
What about NRIs who got stranded in India for the first few months of 2020-21?
Many NRIs complained that they were unable to leave India even during the first few months of 2020-21. Here, the CBDT though a circular issued on March 3, 2021, clarified that a short stay will not result in a change in NRI status.
The circular clarifies that, generally, a person will become resident in India for 2020-21 only if he stayed in India for 182 days. However, most of the countries have the 182-day condition for determining residency. That is almost half a year; a person in most situations will therefore be a resident of only one country.
Is there a possibility of dual non-residency in case of general relaxations?
Yes, there is. If any country provides a relaxation for a stay period of 182 days, then there could be a case of dual non-residency. In other words, you could be a non-resident in India as well as the other country where you had been living and working.
In such a situation, a person may not become a tax resident in any country in FY 2020-21, even after staying for more than 182 days or more in India, resulting in double non-taxation and end up not paying tax in any country.
Will the tie-breaker rule come to the aid of taxpayers in case of some unforeseen conflict?
A person may become resident in India in some cases even if he stays for less than 182 days in India. In that situation, there may be a case of dual residency. In other words, he becomes a resident of India as well as the foreign country.
However, due to applicability of Double Taxation Avoidance Agreement (DTAA), such a person will become resident of only one country as per the "tiebreaker rule" in the DTAA.
It is also relevant to note that even in cases where an individual becomes resident in India due to exceptional circumstances, he would most likely become not ordinarily resident in India and hence his foreign sourced income shall not be taxable in India unless it is derived from business controlled in or profession set up in India.
What is the remedy in case a taxpayer is faced with the possibility of double taxation?
Due to the Double-Tax avoidance treaty, this is a rare possibility. You will have to submit a form by March 31, 2021. The March 2021 CBDT circular has prescribed the form. This form shall be submitted electronically to the Principal Chief Commissioner of Income Tax (International Taxation).
What is the way ahead for NRIs?
Most experts believe that these clarifications will help many NRIs who overstayed in India due to the lockdown and other issues. Amit Maheshwari, Tax Partner, AKM Global, a consulting firm says, “Apart from clarifying that NRIs should not be tax-free both in their home country as well as in India, it gives a leeway in case you’re faced with double taxation.”
Archit Gupta, Founder and CEO, ClearTax says, “This clarification has come with respect to tax residency in India. Earlier in May, CBDT had issued a circular stating that the period of stay from March 22-31 shall not be considered for calculating tax residency in India for FY 2019-20, provided conditions as specified are met.”