Direct Tax Alert: CBDT clarification on residency rule in case of forced stay of individuals in India due to COVID-19

Background

Section 6 of the Income-tax Act, 1961 (IT Act) contains provisions relating to the determination of the residency of an individual. The tax residential status of an individual, viz., “Ordinarily Resident” or a “Resident but Not Ordinarily Resident” or a “Non-resident” is dependent, inter-alia, on the period for which the person is in India during the concerned Fiscal Year (FY) and/or preceding FY(s). Due to the outbreak of COVID-19 and the consequent lockdown, several non-residents were stranded in India and thereby involuntarily increasing their time in the country. Thus, they faced exposure of being regarded as an Indian tax resident. Taking cognisance of the prevailing issues and hardship faced by non-residents, the Central Board of Direct Taxes (CBDT) issued Circular No. 11 of 2020¹ dated 8 May 2020 to grant relief for FY 2019-20 to non-residents who were left stranded in India due to COVID-19. Recently, the Supreme Court² had directed a non-resident taxpayer to make a representation before the CBDT with respect to the tax residency relaxation for FY 2020-21 and the CBDT was directed to consider the representation within 3 weeks’ time.

The CBDT has now issued a Circular³ to address the issue pertaining to the residential status for FY 2020-21 of such non-residents. We, at BDO in India, have analysed and summarised the said Circular and provided our comments on its impact hereunder:

The CBDT has not extended the relaxation for FY 2020-21 as referred in its earlier Circular No. 11 of 2020 dated 8 May 2020 on following reasoning

1. Short stay will not result in Indian residency

Generally, an individual will be regarded as an Indian resident for FY 2020-21 only if he stays in India for 182 days or more unless he is covered by following:

Type of Individual	Total Income from Indian sources	Stay in India
India Citizen or person of Indian origin	Less than INR 1.5 mn during FY 2020-21	182 days or more during FY 2020-21
India Citizen or person of Indian origin	INR 1.5 mn or more during FY 2020-21	a. 182 days or more during FY 2020-21; or b.1 120 days or more during FY 2020-21 and b.2 365 days or more in preceding 4 FYs
Individual who is not an Indian Citizen or person of Indian origin	Not applicable	a. 182 days or more during FY 2020-21; or b.1. 60 days or more during FY 2020-21 and b.2 365 days or more in preceding 4 FYs

Hence, if an individual gets stranded in India for some time during FY 2020-21 by reason of the COVID-19 pandemic, chances are less that he/she would acquire resident status in India during FY 2020-21 only for this reason.

2. Possibility of dual non-residency if general relaxation is granted

If a general relaxation is provided for individual staying for more than 182 days in India during FY 2020-21, then he/she may become a non-resident in India during said FY. Further, most countries have the condition of 182 days or more for determining residential status and thereby, the individual would become a non-resident in such country. Thus, to avoid a situation of dual non-residency and thereby double non-taxation, a general relaxation to such individuals cannot be granted.

3. Tie-breaker residency rule as per Double Taxation Avoidance Agreement (DTAA)

An individual may become a resident in India (for stay is more/less than 182 days in India in certain situations). However, for such dual residency cases, an individual will be regarded as resident of only one country in light of the tie-breaker rules (permanent home, centre of vital interests, habitual abode, nationality, resolution mechanism through Mutual Agreement Procedure) contained in the DTAAs entered by India.

4. Relief available under DTAA for double taxation

a. Taxability of employment income under DTAA

By virtue of Article on Dependent Personal Services contained in most DTAAs, employment income is taxable only in the country in which the employee is resident unless the employment is exercised in the other country (i.e. source country). Further it provides that the source country has taxation rights only if the employee is present in source country for more than 183 days or the employer has a Permanent Establishment (PE) in the source country which bears the remuneration. For instance, if a USA resident under employment of a USA corporation has got stranded in India and performs employment from India, his salary will not be taxable in India unless he is present in India for 183 days or more during FY 2020-21 or if the salary is borne by the Indian PE of such USA corporation.

b. Credit for taxes paid in other country

An Indian tax resident shall be entitled to claim credit of the taxes paid in any other country in accordance with the Rule 128 of the Income-tax Rules, 1962.

5. International Experience

a. OECD⁴ Policy Responses to COVID-19

As per the OECD guidance⁵ issued, it has recognised that DTAAs contain necessary provisions to deal with the cases of dual residency arising due to the COVID-19 situation. It considers following two main situations of individuals getting stranded in a foreign country due to the COVID-19 pandemic and the possible outcome:

• An individual is temporarily away from home (perhaps on holiday or to work for a few weeks) and gets stranded in the host country due to the COVID-19 pandemic thereby attaining domestic law residence. However, he is unlikely to be a resident under the treaty’s tie-breaker rule.
• An individual is working in a jurisdiction (the “current home jurisdiction”) and has acquired residence status there, but temporarily returns to “previous home jurisdiction” because of the COVID-19 situation. He may either never have lost the resident status of “previous home jurisdiction” under domestic laws or may regain resident status on return. Even if he becomes a resident under such domestic rules, he is unlikely to be a resident of that jurisdiction under the tax treaty if the connections to the “current home jurisdiction” are stronger than those to the “previous home jurisdiction”.

b. Relief by other countries

While some countries have provided relief for certain number of days subject to certain prescribed conditions, some countries have not provided any relief. For instance, the USA and UK have provided of upto 60 days subject to fulfilment of prescribed conditions; Australia has issued guidelines for allowing relief by examining facts and circumstances; Germany has clarified that in absence of double taxation, there is no factual inequity if the right to tax is transferred from one country to another due to changed facts etc.

Conclusion

Basis the above reasoning, the CBDT has concluded that:

• The possibility of double taxation of the income for FY 2020-21 does not exist as per the provisions of the IT Act read with DTAAs.
• Even after taking into consideration the relief provided by respective DTAAs, if an individual taxpayer is facing double taxation, such an individual taxpayer may furnish relevant information in the prescribed Form-NR electronically to the Principal Chief Commissioner of Income-tax (International Taxation) on or before 31 March 2021.
• After understanding the possible situations of double taxation, the CBDT shall examine:

1. Whether any relaxation is required to be provided in this matter; and
2. If required, then whether general relaxation can be provided for a class of individuals or specific relaxation is required to be provided in individual cases.

BDO comments

While the CBDT has concluded that the individual taxpayers will not  be impacted due to their prolonged stay in India in light of the DTAAs, it has not taken into cognisance of the individuals who are resident of countries with which India does not have DTAAs. The CBDT has also not taken into account that many countries are following calendar year as tax year whereas India follows fiscal year as it’s tax year. Thus, there would be chances of a particular period when the taxpayer could attain dual residency. While the taxpayer could opt for Mutual Agreement Procedure, considering that such proceedings could be time-consuming, it is uncertain how many individual taxpayers would opt for such route.

Further, while the Circular provides a deadline to file Form-NR i.e. 31 March 2021, there is no visibility on the timeline by when CBDT would issue the clarification in response to the application(s) made.

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