04/05/2020
Change in residential status- big Impact on Citizens of India and persons of Indian Origin being non residents
The Finance Act, 2020 has amended the section 6 of Income Tax Act, 1961 which relates to determining the residential status of a person for taxability of his/ her income in India.
Now Indian citizen or person of Indian origin (POI) will be deemed to be resident but not ordinary resident (RnOR) in India if:
- he is not liable to tax in any other jurisdiction and;
- has total income, other than the income from foreign sources*, exceeding INR 15,00,000.
*Foreign source income means income which accrues and arises outside India except from business controlled from or profession set-up in India.
It may be noted that while non-resident individuals are liable to tax on income earned/received in India only, in case of RnOR, scope of income covers income earned/received in foreign as well if the said income from business controlled from or profession set-up in India.
It may impact the overall taxability of those Indian citizens who are travelling a lot and become non-resident for India. Those individual generally don’t become tax resident of any country and also eligible to relaxed rate and other conditions as available to non-resident. Once a person is treated as “resident but not ordinary resident”, he may not be eligible for relaxations available to non-residents.
It may have impact on the taxability of outbound employees as well, and on employment structuring i.e. deputation vs. assignment vs secondment of employees, economic vs real employer. Currently the issue used to be between two entities only regarding treatment of salary reimbursement by host entity to home entity (whether it is fee for services or just reimbursement, permanent establishment etc.) But now since employee taxability may also get impacted, employee may also need to keep proper documentation around the structuring.
a. One of the condition to treat the Indian citizen or person of Indian origin (POI) as Indian tax resident was that if he is present in India for 365 days in preceding four years and 182 days in the current year. Now it proposed to reduce the threshold of 182 days to 120 days.
Need to take care in the case of outbound employees coming back to India. He can be treated as tax resident if he is in India for more than 120 days.
