1. Stranded Resident Indians
The taxability of a person depends upon his/her residential status in that particular financial year in a particular country.
As per section 6(1) of the Income Tax Act, 1961, a person is considered as a resident in India for a particular financial year if his/her stay in India in that financial year is 182 days or more, or if his/her stay in that financial year is 60 days or more and 365 days or more in immediately preceding four financial years.
Further, section 208 of the Income Tax Act, 1961, requires a person to deposit advance tax on estimation basis in 4 installments, if his total tax liability for a financial year exceeds Rs. 10,000/-. Section 207 of the Income tax Act, 1961, provides immunity to the resident senior citizens not having any business or professional income, from paying such advance tax. However, such relaxation for making payment of advance tax is available only to resident senior citizens and is not available to non-resident senior citizens.
Now consider an example of a resident senior citizen of India, who has gone to USA to meet his son and daughter-in-law on 17.3.2020 for a fortnight. However, since then he is stranded there in USA only, due to lockdown being enforced, courtesy corona, and the resultant suspension of international flights.
So, clearly in this example, the senior citizen has been forced to stay in USA for a period of more than 182 days in the current financial year 2020-21 due to corona, and as a natural corollary, his stay in India in this FY 2020-21 is less than 182 days and infact it is even less than 60 days, as the senior citizen is still stranded in USA.
“So, in this example, whether the senior citizen will be no more a Resident Indian for FY 2020-21 and if that being so, whether he will be liable to pay advance tax now on his dividend and interest income earned by him in India for the FY 2020-21, inspite of he being a senior citizen and not having any business or professional income?”
Sadly, the answer is ‘YES’. And the more worry-some concern is the penal interest u/s 234B and 234C, which the senior citizen might need to pay now, as he obviously would not have deposited the three installments of advance tax (15/6- 15%; 15/9-45%; 15/12-60%) for the FY 2020-21, thinking himself to be resident senior citizen. The only saving grace is the immunity from paying penal interest u/s 234C in respect of his dividend income for the financial year 2020-21, till the date of its payment.
Ironically, the apex regulatory body CBDT has brought in two circulars namely Circular No. 11/2020 dated 8.5.2020 and Circular No. 2.2021 dated 3.3.2021, in respect of Non-Resident Indians who are stranded in India due to corona, but, till date, no such Relaxation Circular has been brought in by CBDT for Resident Indians who are stranded in Foreign Countries due to corona, and as such are not being able to complete their minimum stay of 182 or even 60 days in India in the current financial year 2020-21.
In view of the above, it is indeed desirable that CBDT should take due cognizance and consideration of the ‘fasting’ i.e. the plight and undue hardship of increased tax liability, of the resident Indians stranded in foreign soils due to corona and should take requisite remedial measures to remove this ‘Absentia’ in its approach towards the stranded resident Indians.
2. Stranded Non-Resident Indians
Earlier, CBDT has brought about Circular No. 11/2020 dated 8.5.2020 granting relaxation to the Non-Resident Indians by excluding the period of their forced stay due to corona, from 22nd March, 2020 to 31st March 2020, in India, for determining their residential status for the FY 2019-20.
However, in its recently issued Circular No. 2/2021 dated 3.3.2021, no such relaxation of exclusion of period of forced stay of Non-Resident Indians, has been provided for FY 2020-21.
This Circular envisages and addresses the issue of double taxation only and not the issue of probable adverse tax consequences/increased tax liability of non-resident individuals, due to their changed residential status on account of their forced stay in India.
This Circular surprisingly infers that it is very unlikely that a person will become resident of two countries simultaneously because of the fact that in a financial year there are 365 days only and almost in all the countries the prescribed minimum stay of period for determining the residential status is 182 days only. So, in such a scenario a person will be a resident in the country where his/her stay is more than 182 days and in the other country where his/her stay is less than 182 days, he/she will in any case be considered as a non-resident. Further in article 4 of DTAAs there are tie-breaker provisions for determining the residential status. So, the chances of double taxation are very rare.
The CBDT Circular concludes by asserting that if the person is still facing double taxation even after taking into consideration the relief provided by the respective DTAAs, due to his/her forced stay in India, then he/she may furnish the information in Form NR electronically by 31.3.2021 to CBDT.
Now consider an example of a Dubai, UAE based non-resident Indian, who has settled in Dubai, UAE since last 4 years, and who has come in India on 17.3.2020 for a business expo, but however, due to corona, he has been stranded in India till date.
Now in all these 4 years, his/her income in Dubai was tax-free, as per prevailing Tax Laws in Dubai, and further being a non-resident in India due to his/her stay of less than 182 days in each of these 4 years in India, such NRI was not having any liability to pay any tax in India on his/her Dubai/global income.
“So, will this forced stay of this non-resident in India, due to covid, in current FY 2020-21, for more than 182 days, alter his/her residential status in India from Non-Resident Individual to that of Resident Individual and if so, will his/her otherwise tax-free income in Dubai become taxable in India now?”
Sadly, the answer is YES again. The said CBDT Circular somehow takes such serious and genuine hardship of so many NRIs, in a light and casual manner and suggests that in cases where the forced stay of NRIs in India exceeds 182 days in FY 2020-21, they will be considered as Not Ordinary Resident (NROR) and as such their global income will not be taxable in India.
In some cases, it may hold true, but not in all cases. And unfortunately, in our example of this Dubai based NRI, it may not be true as an individual qualifies as an RNOR only if he/she has been a non-resident in India in 9 out of 10 preceding years or if his/her stay in the preceding 7 years has been 729 days or less. And in this case since the NRI has settled in Dubai since last 4 years only, so obviously he won’t be able to qualify these prescribed conditions for having RNOR status which effectively means that by virtue of his/her forced stay in India for more than 182 days in this financial year 2020-21, he/she has acquired the status of resident individual in India, implying that his/her tax-free Dubai/global income in the financial year 2020-21, going by the present status, will become taxable in India.
So, it seems that this CBDT Circular No. 2/2021 dated 3.3.2021 fails to recognise and appreciate that the moot question is not the double taxation issue but the probable adverse taxation consequences arising out of an individual’s changed residential status due to his/her forced stay of more than 182 days in India, in the financial year 2020-21, due to covid.
Key Takeaways from Above Two Anecdotes:
(i) The option of filing electronic form, similar to recently proposed ‘Form NH’ for Non Resident Indians, should also be provided to Resident Indians especially Senior Citizens, stranded outside India due to Covid, to address there genuine hardships in the form of increased taxation/advance tax liability, due to forced change in their residential status from resident individuals to non-resident individuals, on account of their forced stay of more than 182 days, outside India, for the FY 2020-21, due to covid.
(ii) Even for the Non-Resident Indians, the proposed option of filing electronic form NH by 31.3.2021, should be made more meaningful and fruitful to genuinely and sincerely address the hardships of such non-resident individuals not just on account of the probable double taxation but also their probable adverse/increased tax liability due to forced change in their residential status from non-resident individuals to resident individuals, on account of their forced stay of more than 182 days, in India, for the FY 2020-21, due to covid.