Budget 2020 - Modification of residency provisions- amendment of S. 6 of the Income-tax Act, 1961

[CA DEV KUMAR KOTHARI]

Budget proposal with highlights:

Amendment of section 6.

4. In section 6 of the Income-tax Act, with effect from the 1st day of April, 2021,––

 (a) in clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty-two days", the words “one hundred and twenty days” shall be substituted;

  (b) after clause (1), the following clause shall be inserted, namely:––

 “ (1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

(c) for clause (6), the following clause shall be substituted, namely:––

' (6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is-

   (a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or

   (b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.'. 

From Memorandum:

H. PREVENTING TAX ABUSE

Modification of residency provisions.

Sub-section (1) of section 6 of the Act provide for situations in which an individual shall be resident in India in a previous year. Clause (c) thereof provides that the individual shall be Indian resident in a year, if he,-

(i) has been in India for an overall period of 365 days or more within four years preceding that year, and

(ii) is in India for an overall period of 60 days or more in that year.

Clause (b) of Explanation 1 of said sub-section provides that an Indian citizen or a person of Indian origin shall be Indian resident if he is in India for 182 days instead of 60 days in that year. This provision provides relaxation to an Indian citizen or a person of Indian origin allowing them to visit India for longer duration without becoming resident of India.

Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year, is being misused. Individuals, who are actually carrying out substantial economic activities from India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.

Sub-section (6) of the said section provides for situations in which a person shall be “not ordinarily resident” in a previous year. Clause (a) thereof provides that if the person is an individual who has been non-resident in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for an overall period of 729 days or less. Clause (b) thereof contains similar provision for the HUF.

This category of persons has been carved out essentially to ensure that a non-resident is not suddenly faced with the compliance requirement of a resident, merely because he spends more than specified number of days in India during a particular year. The conditions specified in the present law in respect of this carve out have been the subject matter of disputes, amendments and further disputes. Further, due to reduction in number of days, as proposed, for visiting Indian citizen or person of Indian origin, there would be need for relaxation in the conditions. 

The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

In the light of above, it is proposed that-

(i) the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting India in that year be decreased to 120 days from existing 182 days.

(ii) an individual or an HUF shall be said to be “not ordinarily resident” in India in a previous year, if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6.

(iii) an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.

This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year  2021-22 and subsequent assessment years. 

[Clause 4]

 

The existing section 6, shall, after amendment, as proposed, shall read as follows from 01042021 changes are indicated in green colour:

Income-tax Act, 1961

Residence in India.

     6. For the purposes of this Act,-

     (1) An individual is said to be resident in India in any previous year, if he-

          (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

          (b) ¹[* * *]

          (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

     ²[⁶[Explanation 1].-In the case of an individual,-

          (a) being a citizen of India, who leaves India in any previous year ³[as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and eighty-two days" had been substituted ;

          (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words "sixty days", occurring therein, the words "one hundred and twenty  days" had been substituted.]

     ⁷[Explanation 2.- For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.]

“ (1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

     (2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

  ⁹[(3) A company is said to be a resident in India in any previous year, if-

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

Explanation.-For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.]

     (4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

     (5) If a person is resident in India in a previous year relevant to  an assessment year in respect of any source of income, he shall  be deemed to be resident in India in the previous year relevant to  the assessment year in respect of each of his other sources of income.

   

  ' (6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is-  

  (a) an individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or   

  (b) a Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.'.  

 The existing sub-section 6 is as follows:

⁵[(6)A person is said to be "not ordinarily resident" in India in any previous year if such person is-

          (a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

          (b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.]

Observations of author:

1. As per understanding of author the proposed amendment in clause (b) of Explanation 1. To reduce period from 182 days to 120 days is applicable only   in relation to non-resident Indian who is considered as such as per  S.115C (e ). Which reads as follows with other related wordings etc:

 

¹[CHAPTER XII-A

Special provisions relating to CERTAIN INCOMES of non-residents

Definitions.

115C. In this Chapter, unless the context otherwise requires,-

                      (e) "non-resident Indian" means an individual, being a citizen of India or a person of Indian origin who is not a "resident".

     Explanation.-A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India; 

2. Proposed amendment  of meaning of  “not ordinary resident” by substitution of sub-section (6)  will be applicable in  all situations.

3. Wrong phrase used in memorandum:

In memorandum in para  H heading is given   PREVENTING TAX ABUSE – author feels that the use of this expression is not proper. There is no tax abuse, if tax is paid as per law in any of country if it is payable. One may choose another country where there is no tax. In such circumstances, deeming the person as resident of India, merely because  he is not liable to pay tax in other country, cannot be to prevent tax abuse. The heading can be like modification  provisions relating to  residency.