Analysis of deemed residency

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.

Final Amendments – in the Finance Act 2020

Insertion of clause (1A) to Section 6 “(1A) Notwithstanding anything contained in clause (1), an individual, being acitizen 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;

Amendment in Section 6(6) – Related to above (6) A person is said to be "not ordinarily resident" in India in any previous year if such person is— (a) …….; or (b) …….; or (c) …….; or (d) a citizen of India who is deemed to be resident in India under clause (1A).

Analysis of above amendments

1. The new clause (1A) has been inserted to Section 6 to specifically override Clause (1) of Section 6. As we all know, Section 6(1) is the basic section which determines the residential status of an Individual based on the number of days stayed in India for different categories of Individuals.

2. Thus, technically an Indian Citizen who is Resident as per Section 6(1) but 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, then now he will be FIRSTcovered by the provisions of Section 6(1A)as same would have an upper hand in terms of Notwithstanding provisions. All such Indian Citizen would now be considered as ‘Deemed Resident’ under clause (1A) irrespective of number of days stayed in India.

3. Interestingly, as per the amendment by the Finance Act 2020, deemed resident as per Section 6(1A) i.e. stateless person has further been categorized as “Not Ordinary Resident”. This amendment was aimed to exempt the Bonafide Indian working abroad but seems to result into unintended implications, as discussed hereunder.

4. As we all now that by virtue of proviso to Section 5(1), “Not Ordinary Resident” is not liable to Tax on his Income that accrues or arises outside India unless same is derived from business controlled in or profession set up in India.Thus, technically ‘Not Ordinary Resident’ are not liable to tax in respect of their Global Income in India.

Impact of above Amendments –

1. The underlying legislative intention was to Tax the stateless Indian Citizen by deemed them to be resident of India.

2. But the language used in the newly inserted Section 6(1A) –

a. Covers cases of all Indian Citizens,

b. His Income other than the income from foreign sources, Exceeds fifteen lakh rupees during the previous year,
c. Who are not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature

d. Overrides number of days criteria as per Section 6(1)

3. Thus, for example an Mr A is Indian Citizen and having Indian Income Rs 20 Lakh and Foreign source Income Rs 20 Crore. In facts of the case, Mr A stays in India and had never visited aboard would also now be covered within the Deemed residency provisions of Section 6(1) instead of regular residency provisions Section 6(1).

4. Therefore, in terms of amendment in Section 6(6), now Mr A will be ‘Not Ordinary Resident’ in India. Accordingly, it may be a good case to argue that Entire Global Income if Rs 20 Crore of Mr A (accrued or arisen outside India) would now be out of scope of Total Income in terms of proviso to Section 5(1) of the Act.

5. The impact of the recent amendment would make cases of all the Indian Citizens to be ‘Not Ordinary Resident’ in India, if

a. they are not resident of any other country and

b. having Indian Source Income exceeding 15 Lakh.

6. The resultant picture after careful analysis of insertion of Section 6(1A) along with insertion of Section 6(6)(d), would emerge that in an adventure to tax the stateless person, Government may end up extinguishment of rights to Tax Global Income of all the Indian Citizens who were otherwise Resident of India in terms of Section 6(1).

7. Any clarificatory statement by CBDT in the above intended situation of interpretation of recent amendment would be highly welcomed.