The COVID-19 pandemic necessitated strict lockdowns and border closures which have caused confusion among taxpayers regarding their tax residency. As a result of the restrictions, many people have been forced to spend more time in India than originally anticipated – resulting in expensive changes to their residency and income tax status.
The government recognises the restrictions that the pandemic has imposed on individuals' movement to and from India. On 3 March 2021 the Central Board of Direct Taxes (CBDT), through Circular 2/2021, attempted to provide relief to individuals who are stranded in India due to the ongoing travel embargo and may be subject to double tax in India. The CBDT has sought information from individuals facing double tax liability owing to their forced stay in India.
The clarification sought by way of this circular was highly anticipated by individuals who have been stranded in India during financial year (FY) 2020-2021 and qualify as tax residents of India under Section 6 of the Income Tax Act 1961. However, the circular offers no respite to individuals, unlike that issued in 2020 (for further details please see "CBDT clarifies tax residency for people unable to leave India due to COVID-19").
Circular 2/2021 was issued in light of the Supreme Court's 10 February 2021 order, wherein the CBDT was tasked with deciding the relief to be granted to individuals within three weeks of receipt of such representation for FY 2020-2021 in the wake of the pandemic.
Through its 8 May 2020 circular, the CBDT clarified the residential status of individuals who visited India during FY 2019-2020 and whose stay lasted longer than expected due to the COVID-19 lockdown. The CBDT announced a partial relaxation for determining the residential status of individuals who came to India on a visit before 22 March 2020. As a result, their presence in India during the specified period (ie, from 22 March 2020 (date of quarantine) until 31 March 2020 or their date of departure beforehand, as the case may be) was not considered when determining their residential status in India for FY 2019-2020.
Since the travel embargo lasted well past 31 March 2020, the CBDT received various representations from individuals requesting a relaxation similar to the one introduced in 2020 for determining tax residency status for FY 2020-2021. As these individuals had intended to leave India after a brief stay in FY 2019-2020, their extended stay was a force majeure event caused by the pandemic, which required an exception to be made.
To date, the travel embargo remains in place and India's borders remain closed for most international travellers until 31 March 2021 (which may be extended).
What does the circular provide?
Provisions relating to the determination of an individual's residential status are detailed in Section 6 of the Income Tax Act. The status of an individual, (ie, resident, not resident or not ordinarily resident in India) is dependent on their period of physical stay in India during the previous year or preceding previous years, as the case may be.
Circular 2/2021 highlights the 182-day residency test stipulated by most countries, which automatically qualifies an individual as a resident of any one tax jurisdiction. Owing to the global nature of the pandemic, many countries have provided relief or relaxations to the 182-day rule, thereby leading to a possibility of taxpayers enjoying double non-residency, even if they stay in India for more than 182 days during FY 2020-2021. Tax authorities in the United States, the United Kingdom, Ireland and Australia have issued guidelines on the relaxation of tax laws for individuals affected by the COVID-19 pandemic.
However, individuals could be considered tax resident under the domestic income tax laws of multiple countries, especially in the year in which they immigrated. Tie-breaker rules are included in double taxation avoidance agreements (DTAAs) to help determine which country has the right to tax an individual as the country of residence in case the individual qualifies as a resident (for tax purposes) under the domestic laws of both countries.
Circular 2/2021 concludes that the possibility of an individual being subject to double taxation on their income for FY 2020-2021 is remote. This conclusion is based on the guidance provided by the Organisation for Economic Cooperation and Development, in conjunction with various tax administrations, to address tax issues arising out of the current travel restrictions. With a view to reducing the compliance burden, necessary relaxations have been effected to the overall residency rules worldwide and this, read with the DTAAs, does not offer much opportunity for taxpayers to escape assessment of their income in any particular tax jurisdiction.
With Circular 2/2021, the CBDT has hinted that no major relief will be provided with respect to the residency rules for FY 2020-2021, and it appears that non-residents will have to continue waiting (although for what is unknown).
However, where an individual faces double taxation even after taking into account the relief provided by the relevant DTAA, they can submit the specified information to the principal chief commissioner of income tax (international taxation) on Form–NR electronically by 31 March 2021. Depending on the information submitted, the department will determine whether any relaxation is required in this regard and, if so, whether a general relaxation can be provided for a class of individuals or whether a specific relaxation is required in individual cases.
Hence, relief (if any) will be provided on a case-by-case basis. Affected taxpayers are expected to begin filing their submissions shortly.
