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09 July 2020
With India under strict lockdown from March 2020 due to COVID-19, all airports are shut and all flights have been grounded. Only a few repatriation flights have operated to bring Indian citizens abroad back to India and return foreigners to their home countries.
These flight restrictions have led to confusion among non-resident Indians (NRIs) with regard to their tax residency. Such individuals have effectively been stuck in India, involuntarily increasing their time in the country. This may expose their offshore business and professional income to tax in India, as it may be regarded as controlled from India and the individual may be regarded as 'resident but not ordinarily resident in India'. Further, depending on the facts of the case, if such individuals qualify as ordinarily resident in India, their global income could be exposed to tax in India.
The below chart sets out India's tax residency rules for the past financial year, which ended on 31 March 2020, and the current financial year, which began on 1 April 2020 (as amended by the Finance Act 2020).
Many high-net-worth individuals (HNIs) carry out substantial economic activities from India and plan their period of stay in India such that they remain a non-resident under the Income Tax Act 1961 and do not have to pay tax on their global income in India. Many such individuals arrange their affairs in such a manner that they do not become residents of, and are thus not liable to pay tax in, any jurisdiction.
However, for many individuals, their involuntary stay in a country due to lockdowns and closed airports has rendered them the tax resident of said country. In addition to such HNIs, non-resident employees who were deputed to India and other NRI travellers, who are genuine tax residents of the countries in which they habitually work and reside, may risk being treated as Indian tax residents.
In April 2020 the Organisation for Economic Cooperation and Development (OECD) published guidelines on this matter,(1) advising that:
The OECD guidance notes that since the COVID-19 crisis constitutes exceptional circumstances, national tax administrations must consider a more normal period when assessing a person's residence status. Unfortunately, OECD guidelines have little or no binding effect on national laws, much like any other instrument of international law. However, their persuasive effect is incontrovertible.
After intense pressure from affected taxpayers and developments across the globe, including in the United States, the United Kingdom and Australia, India's Central Board of Direct Taxes (CBDT) finally addressed this issue via a notification of 8 May 2020.(2) Under the notification, the time that an individual spent in India between 22 March 2020 and 31 March 2020 (or the date on which they left India before 31 March 2020) will not be taken into account when determining their tax residence. In addition, where an individual was quarantined on or after 1 March 2020, such quarantine period (until 31 March 2020) will not count when determining their tax residence. This notification pertains only to the 2019-2020 financial year (or 2020-2021 tax assessment year). More clarity on relaxations for the 2020-2021 financial year is expected once the lockdown has been lifted and international flights have resumed.
Mr Denver arrived in Bombay on 22 September 2019 and arranged to fly to Tokyo on 22 March 2020, just short of the requisite 182 days. However, he was unable to do so due to COVID-19. Under the CBDT's notification, his involuntary stay in India from 22 March 2020 to 31 March 2020 will not count towards determining his residence for 2019-2020. He will remain a non-resident for income tax purposes for this financial year, despite exceeding the 182-day stay.
Similarly, if Mr Springsteen, who arrived with Denver, was evacuated to London on 15 April 2020, his involuntary stay from 22 March 2020 to 31 March 2020 would not count when determining his residence for the 2019-2020 year and the 15 days of involuntary stay in 2020-2021 will likely be discounted in accordance with to-be-issued CBDT directions.
The CBDT's notification comes as a relief for many non-residents who are trapped in India due to the lockdown. However, many cases are not covered by its scope. For example, many visitors may have cancelled their travel plans before 22 March 2020 not because they were quarantined, but simply because it may have been unsafe to travel abroad. Many individuals who were visiting India from mainland China or Hong Kong may have been unwilling to return home given the severe quarantine restrictions and protocols in place in those countries even prior to 22 March 2020.
A better CBDT relief package would be to extend said notification beyond the period during which flights to and from India are grounded. The CBDT could consider following Her Majesty's Royal Customs' and the Australian Taxation Office's lead in this regard by waiving a broader stay period (eg, from February 2020) on a case-by-case basis. However, this appears unlikely at this stage.
The CBDT is expected to provide further clarifications on this issue – for instance, whether:
Further, the interplay of COVID-19-related relaxations with the recent amendments to the residency rules introduced by the Finance Act 2020 (eg, the concept of deemed residency and the introduction of a new monetary threshold of total income (excluding foreign source income) exceeding Rs1.5 million, on the basis of which the minimum number of days in India was reduced to 120) could lead to unexpected complications (for further details please see "Federal budget 2020-21: impact on Indian promoters" and "Finance Act 2020: COVID-19 and high-net-worth individuals"). The government has already announced that further relaxations to be issued once international flights resume will exclude the period of stay of stranded individuals up to the date on which such flights resume as normal. Absent further clarification, the 8 May 2020 notification is a step in the right direction to protect innocent NRIs from the draconian Indian tax requirements.
The COVID-19 situation has led to myriad residency conflicts for modern nomads. Such individuals should keep an eye out for further temporary relief measures from the CBDT while collecting evidence that they intended to leave India before the lockdown (should the CBDT permit case-by-case claims).
For further information on this topic please contact Rishabh Shroff, Kunal Savani or Sanjana Rao at Cyril Amarchand Mangaldas by telephone (+91 22 2496 4455) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Cyril Amarchand Mangaldas website can be accessed at www.cyrilshroff.com.
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