CBDT has issued Circular No. 2 of 2021 Dt. 03.03.2021 and discussed about relaxation with regard to residency rule for non residents who have been forced to stay in India because of Covid-19 restrictions.
CBDT has started by discussing the relaxation that was provided to assessee in FY 2019-20 because of lockdown wherein assessee was not allowed to include in his calculation of stay in India the number of days when there was lockdown in the country.
It is important to note here that such lockdown was applicable for more than 4 months in FY 2020-21 and after that as well also international travel was not fully started.
Hence, CBDT had received various representation for providing relaxation with regard to FY 2020-21. In this regard CBDT has discussed various points which are as under:
“I. Short stay will not result in Indian residency:
There may be a situation where a person, who was a non-resident during the previous year 2019-20, gets stranded in India by reason of the COVID19 pandemic for some time during the previous year 2020-21 (‘PY 2020-21’).
In such situations, there are less chances that the person would acquire residence status in India during the PY 2020-21 only for this reason as explained below: –
A. A citizen of India or a person of Indian origin may become resident in India only in one of the following situations: –
(i) if his total income from Indian sources (i.e., other than the income from foreign sources) does not exceed fifteen lakh rupees in PY 2020-21 and he stays in India for 182 days or more during the PY 2020-21; or
(ii) if his total income from Indian sources (i.e., other than the income from foreign sources) exceed fifteen lakh rupees in PY 2020-21 and
(a) he stays during PY 2020-21 for 182 days or more; or
(b) he stays during the PY 2020-21 for 120. days or more and also stays for 365 days or more in preceding four previous years.
B. An Individual who is not citizen of India or a person of Indian origin may become resident in India only in one of the following situations: –
(i) if he stays during PY 2020-21 for 182 days or more; or
(ii) if he stays during the PY 2020-21 for 60 days or more and also stays for 365 days or more in preceding four previous years.
Thus, generally, a person will become resident in India for the PY 2020-21 only if he stayed in India for 182 days or more unless he is covered by the exceptions discussed above.”
Thus, in the above point CBDT has only discussed that most of the people who were stuck in India would not become resident in India as they would not stay for 182 days in India or 120 days in previous year and 365 days in previous 4 years or 60 days in previous year and 365 days in previous 4 years and would have left India.
For many people who were not of Indian origin the above situation might be true as they might not fulfill the condition of 365 days but for people of Indian origin who have just got a new job outside India and had to return back to India might fall under above definition because of work from home and become resident in India.
II. Possibilities of dual non-residency in case of general relaxation:
“Most of the countries have the condition of stay for 182 days or more for determining residency. Thus, a person in most situations will be resident in only one country since there are 365 days in a year. In fact, if general relaxation for the stay period of 182 days is provided, there may be cases of double non-residency. In such situation, a person may not become a tax resident in any country in PY 2020-21 even after staying for more than 182 days or more in India resulting in double non-taxation and end up not paying tax in any country.”
The second point discussed by CBDT here is that by giving a general relaxation might become create a situation where the person is a not resident in any country and hence will not be liable to be taxed anywhere. However this cannot be a reason for not giving relaxation to people, also punishing one innocent to catch other non innocent people is injustice.
III. Tie breaker rule as per Double Taxation Avoidance Agreement (DTAA):
“As discussed above, a person may become resident in India in some cases even if he stays for less than 182 days in India. In that situation, there may be a case of dual residency.
However, due to applicability of Double Taxation Avoidance Agreement (DTAA), such person will become resident of only one country as per the “tie breaker rule” in the DTAA. For example, the Indo-USA DTAA contains following tiebreaker rule in Article 4(2):
“Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows:
(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
(b) if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. “
Thus, as per the provisions of the Indo-USA DTAA, a person can become resident of two countries only in the following case:
(a) he has a permanent home available to him in both countries or in none of the two countries; and
(b) centre of vital interests cannot be determined; and
(c) he has a habitual abode in both States or in neither of them; and
(d) he is a national of both States or of neither of them.
Even in such situations when all the above (a) to (d) are applicable (which may be a very rare situation), the Indo-USA DTAA provides a resolution mechanism through Mutual Agreement Procedure.
It is also relevant to note that even in cases where an individual became resident in India due to exceptional circumstances, he would most likely become not ordinarily resident in India and hence his foreign sourced income shall not be taxable in India unless it is derived from business controlled in or profession set up in India.”
In the third point CBDT has discussed tie breaker rule where if a person of Indian origin becomes resident as per 120 days rule and at the same time becomes resident of another country then in case of dual residentship tie breaker rules available in various DTAA will be applicable.
However here the cases have not been discussed where a person stays in India for more than 182 days but is working for business or employer outside India and is stuck in India and working from home because of non availability of 100% security in travel from one country to another.
“IV. Employment income taxable only subject to conditions as per DTAA:
Further, Article related to employment income in the DTAA with different countries governs the taxation of employment income. For example, Article 16 of the Indo-USA DTAA provides following for taxation of employment income:
“DEPENDENT PERSONAL SERVICES:
I. Subject to .the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service). 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. NotWithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting Slate shall be taxable only in the first mentioned State, if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year,’
(b) the remuneration is paid by, or on behalf of an employer who is not a resident of the other State,’ and
(c) the remuneration is not borne by a permanent establishment or affixed base or a trade or business which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneratiol1 derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.”
The DTAA distributes the taxation rights between the employee’s jurisdiction of residence and the place where the employment is exercised, Salaries, wages and other similar remuneration are taxable only in the country in which the employee is resident unless the employment is exercised in the other country.
Generally, as per the DTAAs, such other country (the source jurisdiction) has taxation rights only if the employee is present in that country for more than 183 days or the employer is a resident of the source jurisdiction, or the employer has a permanent establishment in the source jurisdiction that bears the remuneration.
Accordingly, if a USA resident under employment of a USA corporation has got stranded in India and performs employment from India, its salary will not be taxable in India unless he is present in India for 183 days or more during the PY 2020-21 or if the salary is borne by Indian permanent establishment of such USA corporation.”
The fourth point discussed by CBDT is the most important point and shall affect most people i.e. taxability of salaried employee. Here CBDT has mentioned that a salaried employee will get benefit of DTAA and hence his salary will only be taxed in India if his stay in India is for more than 183 days which according to CBDT would cover a very small number of people.
However from the queries we have received this could be a large number as many people were not able to travel abroad or didn’t travel to other country till Diwali as many companies outside India had provision of work from home and many people decided to not take risk and take benefit of work from home.
“V. Credit for the taxes paid in other country:
Further, a resident person in India 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″
As we have talked above about salaried employee who might get taxed in India if no relaxation is provided and although they might get credit of taxes paid abroad but personal taxes in India is much higher in India as compared to many other countries and due to weak position of Indian rupee in international market many people might end up paying 33-42% tax in India.
“VI. International Experience
A. The Organisation for Economic Co-operation and Development (OECD):
The Organisation for Economic Co-operation and Development (OECD) in its OECD Policy Responses to Coronavirus (COVID-19), [OECD Secretariat analysis of tax treaties and the impact of the COVID-19 crisis, Version 3 April 2020 available at https://www.oecd.org/coronavirus/policy-responses/oecd-secretariat-analysis-
of-tax-treaties-and-the-impact-of-the-covid-19-crisis-947dcb01/#section-dle328 has provided following guidance on this matter:
“28. Despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position.
30. Two main situations could be imagined:
1. A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there.
2. A person is working in a country (the “current home country’) and has acquired residence status there, but they temporarily return to their “previous home country” because (!f the COVID-19 situation. They may either never have lost their status as resident of their previous home country under its domestic legislation, or they may regain residence status on their return.
31. In the first scenario, it is unlikely that the person would acquire residence status in the country where the person is temporarily because of extraordinary circumstances. There are however rules in domestic legislation deeming a person to be a resident if he or she is present in the country/or a certain number of days.
But even if the person becomes a resident under such rules. if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty. Such a temporary dislocation should therefore have no tax implications.
32. In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation.”
Thus, it has been recognised by the OECD that DTAAs contain the necessary provisions to deal with the cases of dual residency arising due to COVID-19 situations.
B. Relief by other countries:
A study of the measures taken by different countries reveals that there is mix response some of the countries have provided relief for certain number of days subject to the satisfaction of prescribed conditions whereas some of the countries have not provided any relief.
For example, USA have provided relief up to a maximum of 60 days subject to the satisfaction of certain conditions and furnishing of information in specified Form. Similarly, UK has provided relief of 60 days in exceptional circumstances depending on fact and circumstances of each case.
Similarly, Australia issued guidelines for allowing relief by examining facts and circumstances. Germany has clarified that in the absence of a risk of double taxation, there is basically no factual inequity if the right to tax is transferred from one contracting state to another due to changed facts.”
Thus, based on the above discussion it can be seen that even the international organisation and various countries are sure that no assessee would be liable to tax in other country and DTAA are strong enough to stop such double taxation.
However in our humble opinion no one has commented on work from home which is going to be a huge gamechanger and no modification have been suggested to incorporate the same in any law as even in DTAA we are still majorly depending on to tax the salary income in the country where employment is physically exercised.
Hence, in the end CBDT is of the opinion that as of now there is no requirement for any general relaxation with residency rule, however they have asked people to fill a Form if they are facing any problem and then CBDT shall decide whether to give any general relaxation or specific relaxation.
Relevant extract of CBDT’s conclusion is as under:
“After understanding the possible situations of double taxation, the Board shall examine that:
(i) whether any relaxation is required to be provided in this matter; and
(ii) 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.
Therefore, if any individual is facing double taxation even after taking into consideration the relief provided by the respective DTAAs, he may furnish the information in Form-NR annexed to this circular by 31st March, 2021. This form shall be submitted electronically to the Principal Chief Commissioner of Income-tax (International Taxation).”
In the end we would say that no relaxation has been provided as of now and it shall be available if more and more people fill the Form.
Link for the Form is as under:
Although the link is provided above but the same is a broken link and one could not find any form using the above link and people have to wait till CBDT provides another link or they could have even linked this form on e filing website.
However the Form has been shown in the above mentioned circular.
To read/ download the circular CLICK HERE.