When it comes to taxation, taxpayers often say that expecting any relief is just ‘hoping against hope’. Indians are no exception.
But in a surprise, India's tax authorities finally clarified the tax residency status for the 2020-21 financial year of those who had to stay on in India during the COVID-19 phase. The clarification not only increases the potential tax exposure of non-residents, but also increases compliance obligations under India's tax laws.
Non-residents visiting India during the 2019-20 financial year phase found themselves struck either due to the ban on international flights from March 2020 or due to quarantine.
In May, the tax authorities clarified that the period starting from the date of quarantine - March 22 - will not be counted for determining tax residency for the 2019-20 financial year. The pragmatic step was hailed across the board.
No clarity was given at that time for the status on 2020-21 financial year. As the flights ban continued into 2020-21, non-residents expected that a similar concession will be extended.
It is only on March 3, 2021 - near the end of the financial year 2020-21 - that the authorities issued a clarification after the intervention by the Supreme Court. The clarification surprised everyone as it provides that the period of stay in India during 2020-21 financial year will be counted for determining the tax-residency status in India.
The clarification also requires non-residents to determine their global tax liabilities on or before March 31, as the deadline to seek relief from double taxation on such global income expires on that day.
An individual’s tax residency determines the taxability of his/her global income under India's tax laws. The anxiety of becoming a tax resident in financial year 2020-21 is understandable as:
* The individual’s global income for 2020-21 financial year will be taxed in India if the individual was also a tax resident in any two out of ten previous financial years;
* The individual will have to remain conscious about his/her stay duration in next 10 years as the probability of becoming an ‘ordinarily’ tax-resident in India and tax on global income in the future increases.
* The salary income of employees of foreign companies working from India becomes taxable in India.
Relief under DTAA and timeline
The authorities have cited Double Tax Avoidance Agreements (DTAAs) to clarify that individuals can claim reliefs from double taxation. Though DTAAs do aim to avoid such a tax, the individuals will have to go through a maze of intricate DTAA rules to claim the relief.
Enhanced scrutiny from Indian tax authorities cannot be ruled out.
Implications on salaried
Many salaried employees decided to ‘work from home’ from India while remaining employed at UAE companies are finding themselves at the receiving end as no relief is contemplated in DTAA.
The DTAA between UAE and India also provides that the salary income earned by a tax-resident of India will be taxed in India even though the salary was paid into a UAE bank account. Indian taxes will not be imposed on such salary income only if the employment is ‘exercised’ in the UAE. As per OECD, employment is ‘exercised’ in the place where the employee is physically present when performing the employment activities.
Once their period of stay in India during 2020-21 financial year is counted in, it is likely that such employees will be treated as tax-residents in India if their stay is for more than 182 days. In such situations, their salary income could be taxed in India.
Relief from double taxation
The tax authorities have clarified that if a person faces double taxation despite the relief provided under DTAAs, he/she may furnish the information to the tax authorities to seek specific relaxation from double taxation. However, time is running out to submit the information as the deadline is March 31.
The clarification has perhaps come late for individuals to plan for their taxes. Individuals should expeditiously determine their tax liabilities on their global income and on double taxation, if any, to seek relief from Indian authorities.
- Pankaj S. Jain and Deepak Bansal are with AskPankaj Tax Consultants.