Amendment In Section 6 And Effect On NRI Taxation – Impact Of Finance Act 2020

CA Tanpreet Kohli has analyzed in detail the impact upon Non-Resident Indians (NRIs) of the amendment to section 6 of the Income-tax Act, 1961 by the Finance Act 2020. He has pointed out that while the amendment is intended to plug tax planning by way of residential status, there are several challenges that will arise during its interpretation and this may lead to litigation between the taxpayers and the authorities

Introduction
The Income Tax Act, 1961 (“The Act”), taxes a “Person” on the basis of its residence, which is unlike countries like United States of America, which taxes on the basis of citizenship.  In the Act, the cardinals of Residence in India is laid down by Section 6 of the Act, which categorises a resident into 3 categories, namely:

1. Resident

a. Resident and Ordinarily Resident (“ROR”)

b. Resident but Not Ordinarily Resident (“RNOR”)

2. Non-Resident (“NR”)

With Finance Act, 2020 (“FA, 20”), a paradigm shift has been made to the concept of residential status. In this article, emphasis has been supplied to these amendments made in Section 6(1) and Section 6(6) of the Act. Thereafter, the article also intends to illustrate the issues in the amendment and the impact on the individuals effected by the amendment.

From the Act

At the onset, it is essential to quote the amended Section 6(1) and Section 6(6), which are reproduced as under:

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) [***]

(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.

Explanation. 1—In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year 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 eighty-two days" had been substituted and in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year," for the words "sixty days" occurring therein, the words "one hundred and twenty days" had been substituted.

(1A)Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that 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.
…………

(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.

(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty-two days; or

(d) a citizen of India who is deemed to be resident in India under clause (1A)

Explanation — For the purposes of this section, the expression "income from foreign sources" means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India)

On a plain reference to the above underlined extract, one is to observe that the amendment hits two targets with one arrow and hence, it is essential to refer to these two different amendments, as is done in the subsequent paragraphs.

Amendment 1 – Change in basis of classification “Resident”

As per the amendment made by the Finance Act, 2020, a person is to be classified as a resident of India, if:

1. The Person is in India for 182 days of more (Unchanged) or;

2. The person has been in India for a collective of 365 days or more in the past 4 financial years and 60 days or more in the current financial year (Unchanged)

However, for the clause 2 above, the Act provides that the 60 days or more criteria is to be replaced as under:

a. For a person leaving India being Crew of an Indian ship or for the purpose employment outside India – 182 days or more (Unchanged)

b. For Citizen of India or Person of Indian Origin:

i. For a person having Total Income other than income from foreign sources of Rs 15 lakhs – 120 days or more (Amendment)

ii. Other than mentioned below – 182 days or more (Consequential effect of amendment)

To summarize, an additional condition has been introduced on the classification of a Citizen of Indiaor Person of Indian Origin (“PIO”), wherein, those with following criterion become resident under Sec 6(1) – 

a. total income, other than income from foreign sources, should exceed INR 15 lakhs; and

b. total stay in India during the year should be more than 119 days; and

c. the period of stay in India in the immediately preceding 4 years should be 365 days or more

Essentially, such Citizens of India or PIO’s, whose period of stay in India is 182 days or more, were anyway considered as residents and will continue to be considered as residents. Thus, there will be no impact of the amendments on such individuals.

Connected with this amendment in Clause (b) to Explanation 1 of Sec 6(1), is Sub Clause (c) of Sec 6(6), which states that those effected by this amendment shall be considered to be RNOR, if their stay is for 120 days or more but is less than 182 days. Post 182 days or more, Clause (a) of Section 6(6) applies. At a glance, the amendment is reflected by the table as under:

S.No	Stay of individual in India during the financial year [1]	Total Income (other than income from foreign sources)	Residence status of individual prior to amendment	Residence status of individual pursuant to amendment	Whether amendment has any Impact?
	Less than 120 days	More than INR 15 lakhs	Non-resident	Non-resident	No
	Less than 120 days	Less than or equal to INR 15 lakhs	Non-resident	Non-resident	No
	120 days or more but less than 182 days [2]	Less than or equal to INR 15 lakhs	Non-resident	Non-resident	No
	120 days or more but less than 182 days [2]	More than INR 15 lakhs	Non-resident	Resident but not ordinarily resident	Yes
	182 days or more	Any level of income	Resident [3]	Resident [3]	No

Notes:

[1] Indian Citizen or Person of Indian Origin who being outside India comes to visit India during the year and stay in India in the immediately preceding 4 years exceeds 365 days

[2]Additional parameter introduced by Finance Act, 2020, by amendment in Clause b of Explanation 1 to Section 6(1)

[3]In case such individual is a non-resident in 9 out of 10 preceding years or if such individual has been in India for an aggregate period of 729 days or less in the preceding 7 years, then such individual shall qualify as not-ordinarily resident

Amendment 2 – Categorisation of an Individual as “Deemed Resident”

Clause 1A has been newly inserted in Section 6, with the intent of introducing the concept of “Deemed Resident”. For the applicability of Section 6(1A), an Individual should:

a. Be a citizen of India

b. Have total income, other than the income from foreign sources, exceeding Rs. 15 lakh rupees during the year

c. Not be liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature

It is on fulfillment of these conditions cumulatively that the individual shall be classified as a “Deemed Resident” of India.With the further operation of Sec 6(6)(d), such deemed resident shall be considered to be RNOR.

The memorandum to the Finance Bill 2020 states that the objective of the provision is to tax such individuals who are stateless persons and are not liable to tax in any country by reason of his residence. Therefore, it is essential to deliberate upon the following terms and understand their meaning:

– What is the issue of “Stateless persons” ?

– What is meant by “Not liable to Tax in any Country” ?

Stateless Person –In tax planning, there is a jargon called "Tax Nomad“, wherein, individuals usually the HNI’s, seeking to avoid tax would plan in such a way that they would be non-residents of all the countries imposing income-tax. That is, they plan their visits/stays in the respective countries so as to bypass the criteria of “Number of Days” required to be classified as resident. Assuming that for determining residential status – several nations have similar criteria (182 day’s stay) – it is practical to become a tax non-resident. The person in the above scenario intending to escape “residential status”, so as to escape the clutches of tax norms, is what is referred to by the Memorandum to Finance Bill 2020 as a “Stateless Person”.

Fundamentally, there is no fixed guideline or checklist to identify who is a tax nomad and who isn’t. There can always be genuine situations leading various person to travel to multiple countries and not merely due to some malafide intention. However, the Government of India found it prudent to link the residence to citizenship as it makes tax planning a complicated, while also making a departure from the consistent basis of taxation followed by the Income Tax Act, 1961.Thus, with the introduction of Sec 6(1A), a hybrid system of residency is sought to be established wherein  both residence on the basis of number of days in India and citizenship of India shall be key parameters.

Not liable to Tax in any Country – The amendment in Section 6(1A) gets attracted when the individual 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. Therefore, it becomes of prime essence as to understand what is actually meant by the term “Not Liable to Tax”.

Per the layman understanding, the term “Not Liable to Tax” would mean that the individual does not have to pay any tax. However, under taxation jurisprudence, the term “Not liable to tax” is not the same as ‘exemption from tax’ or “non-payment of tax’ or ‘not being subject to tax’. Expression ‘liable to tax’ does not necessarily imply that person should actually be liable to tax; it is enough if other contracting State has right to tax such person, whether or not such a right is exercised. This has been under core consideration in a variety of judgements, including:

Union of India versus Azadi Bachao Andolan, 263 ITR 706 (SC), Emirates Shipping Line versus ACIT, 349 ITR 493 (Delhi), ITO v. Birla Sunlife Management Co. Ltd., [2010] 3 taxmann.com 782 (Mumbai – Trib.)

Basis the foregoing paragraphs and the memorandum to Finance Bill, one is to reasonably conclude that the applicability of the amended section would arise only if the Citizen of India is not liable to pay tax by reason of residence, domicile or any other criteria of similar nature as explained in the memorandum i.e. Citizen of India should not qualify as resident of any country and consequently not liable to pay tax in any country. In simple terms, the impact of the amendment should be only on such Indian citizens who are not liable to tax in any country by not qualifying as resident of any country and not on those not being subject to tax under the local laws of the Country, like UAE. However, the interpretation of the tax authorities could differ on simply a bare reading of the section, which could potentially lead to disputes.

Issues in the amended section 6(1), 6(1A) and 6(6)

1. Meaning of the term “Income from Foreign Sources”

For the amendment to apply, an essential criterion laid by the Act is that the individual should have ‘total income, other than the income from foreign sources, exceeds Rs 15 lakhs’. In the amendment made in Section 6(6), an explanation has been inserted wherein the term “Income from foreign sources" has been defined to mean

“income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India)”

Therefore, it can be deliberated that the following incomes will be includible while computing the threshold of 15 lakhs:

a. income that accrues or arises in India or is deemed to accrue or arise in India (A)

b. Income that is received in India or is deemed to be received in India (B)

c. Income that accrue or arise outside India but is derived from a business controlled in or a profession set up in India (C)

Simply putting, Income Category (A) and (B) are equally taxable for all individuals being ROR, RNOR and NR. However, an NR is not liable to tax on the Income Category (C), while an RNOR has to account such income as taxable in India. Therefore, it can be summarized that the impact of amendment is the Income to the extent stated in Category (C) above.

2. Meaning of “derived from a business controlled in or a profession set up in India”

An aspect of important essence is now the definition of the term “Derived from a Business Controlled in or a Profession set up in India”. The same is highlighted through an illustration as under:

Mr X is an Indian Lawyer, having obtained the Certificate of Practice from Bar Council of India. He has his set up in India and a branch in Singapore. Mr X advises only foreign clients and as such he is normally in Singapore for more than 183 days every year. For such advisory, he performs the backend operations from his office in India. During the year under consideration, Mr. X comes to India for 130 days. His income from advisories in India is Rs 1 Crore while his fees from Foreign client is Rs 3 Crore.

Taxability

Prior to Finance Act, 2020, Mr X was a non-resident and hence, only Rs 1 Crore was taxable before the Indian revenue authorities. However, post the amendment in Finance Act, 2020, Mr X shall be liable to tax on Rs 4 Crore, being total of 1 Crore Indian Income and Rs 3 Crore from foreign income. However, it is to be noted that one has to adjudge the taxability as per DTAA using the Tie Breaker Rule, which is discussed in the subsequently.

Essentially, the question as to the income is “derived from a business controlled in or a profession set up in India” becomes the factual consideration in every scenario and thus, would be under the radar of the tax authorities.

3. Computation of Threshold of INR 15 Lakhs

The computation of INR 15 Lakhs has various incomes includible and excludible aspects, considering the accrual and receipt of incomes.  However, it is essential to understand here that many such incomes, which otherwise are exempt/deductible to NR, are taxable in the hands of a resident (both ROR and RNOR). Some of these include as under:

a. 10(4C) – Interest payable on Rupee Denominated Bonds

b. 10(4D) – Income from transfer of units in IFSC

c. 10(15)(iv)(fa) – Interest on foreign currency deposits

d. 10(15)(ix) – interest from a unit in IFSC

e. 47(viia) –Relief in Capital Gain on transfer of GDR

f. 47(viiaa) – Relief in Capital Gain on transfer Rupee denominated bond

g. 47(viiab) – Relief in Capital Gain on transfer  capital asset in IFSC

Further, by the virtue of respective DTAA application, many Incomes are exempt for a non-resident, while a resident cannot claim a benefit under these DTAA provisions. Therefore, the guiding question that arises out of the above is whether such nature of income exemption in respect of which is given with reference to status of “non-resident” under the Act  and DTAA  are to be considered while computing threshold of INR 15 lakhs ?

In such cases, two views may be possible

► Residential status should be evaluated first, so as to compute the threshold of INR 15 Lakhs: Under this view, the first step will be evaluating the residential status. Accordingly, exemptions available to a NR should not be considered till ascertainment of residential status. Consequently, the computation of income should be made by considering the individual to be a resident so as to evaluate the applicability of INR 15 lakhs threshold.

► Exemption available to non-residents to be considered, so as to compute the threshold of INR 15 Lakhs: Under this view, exemption available to non-residents should be allowed, by considering such individuals as NR and accordingly any such exempt income will not be considered while computing total income for evaluating applicability of INR 15 lakhs threshold. However, if the total income still exceeds INR 15 lakhs, then such individual qualifies as RNOR.

4. Residents of multiple Countries – DTAA View

Under the provisions of Respective DTAA’s of various countries, term “Resident” has been differently defined. Taking the example from DTAA with UAE, a person is considered to be a resident:

a. in the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature;

b. in the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE 

Similar are the DTAA’s with other countries as well. Therefore, there might arise a situation when the individual happens to be resident of both the contracting states (subject to the availability of Tax Residency Certificate to claim the benefit of DTAA). Therefore, in such situations, the DTAA’s place some guiding parameters referred to as “Tie Breaker Rule”, which apply in the following order of priority:

I. State of location of Permanent home home arranged and retained for permanent use;

II. State where Personal and Economic relations are situated;

III. State where the person has Habitual abode;
IV. State of Nationality of individual;

V. Mutual agreements amongst competent authorities.

Impact of amended section 6(1), 6(1A) and 6(6)

1. Concessional tax rates lost – On becoming RNOR, the following concessions are lost:

a. 115A(1)(a)(i) – Dividend income (subject to further reduced rates under DTA)

b. 115A(1)(a)(ii) – Interest received from Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency

c. 115A(1)(a)(iia) – Interest received from an infrastructure debt fund referred to in section 10(47)

d. 115A(1)(a)(iiaa) – Interest received from an Indian company on rupee denominated bonds (specified in section 194LC)

e. 115A(1)(a)(iiab)/(iiac) – Interest on rupee denominated bond referred to in section 194LD and income from units of business trust referred in section 194LBA

f. 115(1)(a)(iii) – Income received in respect of mutual fund units specified under 10(23D) or units of Unit Trust of India purchased in foreign currency (subject to further reduced rates under DTA) and [Dividend income from mutual funds eligible for rate prescribed under DTAA in respect of dividend income (DR. Rajnikant R. Bhatt versus CIT, [1996] 222 ITR 562, AAR)]

g. 115A(1)(b) – Royalty or fees for technical services received by a foreign company or non-resident non-corporate assessee (subject to certain conditions)

h. 115AC – Interest or dividend income arising in the hands of a non-resident from specified bonds or Global Depository Receipts or income in the nature of long-term capital gains arising from transfer of the bonds.

2. Foreign Assets Reporting – In the return of income, an individual, earlier being an NR, on now becoming an RNOR, shall be required to disclose the following in Schedule FA

a. Table A – Details of Foreign Bank Accounts

b. Table B – Details of Financial Interest in any Entity

c. Table C – Details of Immovable Property

d. Table D – Details of any other Capital Asset

e. Table E – Details of account(s) in which one has signing authority and which has not been included in Schedule A to D above

3. DTAA Benefits Lost – Example: Taxability of Dividend Taxable

In case of residents, tax is required to be paid at slab rate applicable based on total amount of taxable income of the resident individual (highest tax slab 30% plus surcharge and cess). In case of non-residents, tax is required to be paid at 20% under the Act (plus surcharge and cess as applicable). However, DTAA entered into by India with Singapore, UAE, Mauritius, Hong Kong etc provides for NIL/concessional rates.

Further, no further surcharge or cess is required to be paid over the rate prescribed under DTAA

Key Take Away

Once an individual qualifies as an RNOR pursuant to the amendment, the following consequences will follow:

a. Increase in scope of total income: Income that accrues or arises outside India but is derived from business controlled in or profession set up in India will now become taxable in India in the hands of RNOR.

b. Loss of exemptions: Various exemptions that are available to a non-resident will be lost on becoming RNOR.

c. Loss of concessional rate of tax/ presumptive scheme benefits: Various nature of income that are taxable at concessional rates in the hands of non-residents (5% to 20%) will become taxable at normal slab rate applicable in the hands of RNOR.

d. Benefits provided under DTAA lost: Once an individual becomes resident of India, after the application of tie breaker rule, various concessions given under the DTAA with regard to capital gain, dividend, etc will be lost.

e. Foreign assets reporting: Once an individual qualifies as a resident (including RNOR), he will be required to furnish a schedule called Foreign Asset in the return of income disclosing details of all assets held outside India. This will increase the reporting requirements of the individual.

f. Increased onus to substantiate non-taxability of income: Indian Income Tax Officer will have greater jurisdiction on such individuals and such individuals will be required to justify as to why income from a particular source is not taxable.

g. Uncertainty in the rate of deduction of TDS: With the provision of residency placed to various parameters, there might arise a chaos as to the basis on which the tax is to be deducted, ie, is it to be under Sec 195 of the Act or under other provisions from Sec 194 to 194N, as is applicable on all residents.

COVID 19 Effect and Relief Announced

With the outbreak of COVID 19 being faced in India and the imposition of stringent measures effecting from March 2020, especially the suspension of international flights on 22nd March 2020 and the declaration of a country vide lockdown, many Non Resident are forcefully bound for an extended stay in India.

Due to the onset of the new Financial Year from 01st April 2020, being the effective date of activation of the amendments, there is an accelerated possibility of many Non-Resident Indians being entangled in the amended provisions of Sec 6(1) and Sec 6(6). An extension of this fear is also on the other Non-Residents (other than NRI’s), since they may now be under the fear of being categorized as resident under the already existent provisions of Sec 6(1).

Though there is no present relief sighted for the computation of period for determination of residency for FY 2020-21 (the present year), a relief circular has been issued by CBDT on 08th May 2020 (Circular No 11 of 2020), for granting a relief corresponding to FY 2019-20 (the previous financial year).

In this circular, it has been stated that for the computation of period of stay in India, period of stay in India shall be ignored, if such period pertains to

► Inability to leave India (Period between 22nd March to 31st March)

► Departure on evacuation flight on or before 31st March 2020 (Period between 22nd March to the date of departure)

► Departure before 31st March 2020 or has been stuck in India as on 31st March 2020 due to Quarantine in India post 01st March 2020 (Period from 01st March 2020 to the date of departure or 31st March 2020)

While no such measure has yet been introduced for FY 2020-21, one can except such well sought relief measures to come up in future, especially due to the unfortunate effects of COVID 19.

Conclusion

While the reasoning behind the amendment, as presented in the Memorandum to Finance Bill 2020, states to plug tax planning on account of residential status, however, it is to be understood that not every tax planning is tax evasion. The amended section presents various challenges in itself, thereby causing to lead a future litigation with the tax authorities. That being said, the amendment in the Finance Bill 2020, viz a viz, that approved by Finance Act 2020, are starkly different, with the later providing some reliefs, while the former being with an absolute applicability on all Citizens of India and/or Persons of Indian Origin.

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