Covid-19 May Increase Tax Liability For Non-Residents, Experts Say
Covid-19 may result in prolonged stay in India and can impact tax planning for non residents, experts say.
Extended stay of non-residents and foreigners in India as a result of Covid-19 lockdown may result in higher tax liability for them.
Non-residents may remain stuck in India due to travel restrictions, prevailing illnesses or restrictions imposed by other countries. The prolonged stay may result in higher tax incidence if their stay exceeds the prescribed thresholds, unless the government provides specific exemptions for mitigating the additional liability, Nand Kishore, partner at DSK legal, told BloombergQuint.
The Taxation Regime
Under the income tax law, a person is classified as a ‘resident’ or ‘non-resident’ basis the duration of her stay in India during a financial year. The threshold for this stay was amended via Budget 2020. Now, a person qualifies as resident if she remains in India for a period exceeding 120 days in a financial year. Until last year, the residency threshold was 182 days.
Once classified as a resident, the person’s global income becomes liable to tax. Simply put, if a non-resident ends up crossing the 182-days threshold for last year or 120 days for this year, she may be taxed on her global income.
Indian income tax law does not differentiate between voluntary and involuntary stay of a person to determine her residence for the purpose of taxation, Ashok Shah, senior partner at N.A. Shah Associates LLP, told BloombergQuint.
“As such, a person staying beyond the prescribed thresholds may attract tax liability even if she wanted to leave India,” Shah said.
Non-residents plan their stay so as to avoid tax liability in India. But pandemic-related travel restrictions may play spoilsport. The ongoing lockdown could affect the residency status in cases where persons were already operating on the borderline of residency requirement of previous years, Sameer Jain, partner at PSL Advocates, pointed out. He explained this through an illustration.
Lets say X is a non-resident Indian citizen who had stayed in India for 179 days during FY19-20 and was to travel out of India on March 24, 2020. Due to travel restrictions, she would lose her status of non-resident for FY 2019-20 as the stay will now exceed 180 days.Sameer Jain, Partner, PSL Advocates and Solicitors
Shah pointed to measures taken by foreign jurisdictions to tackle such issues. The U.S. recently issued a conditional notification giving an exemption of 60 continuous days to those people who were forced to stay due to Covid-19, he said.
India is yet to notify any such relief.
Possible Defenses
As taxpayers await clarity from the government, judicial precedents may come to their aid.
Jain pointed to a 2015 decision of the Delhi High Court in the Suresh Nanda case. The court dealt with the question of whether a person can be considered as an unwilling resident in India due to situations beyond her control. The court relied on the principle of equity and answered the question in affirmative, Jain of PSL Advocates explained.
[The assessee] virtually became an unwilling resident on Indian soil without his consent and against his will. His involuntary stay during the period that followed till the passport was restored under court’s directive, thus, must be excluded for calculating the period under Section 6(1)(a) of Income Tax ActSuresh Nanda Case, Delhi High Court
The Suresh Nanda case has attended finality as the special leave petition against it was dismissed by the apex court, Jain said.
A person may adduce evidence to demonstrate that she wanted to go out of India but restrictions in other countries curtailed her move — such evidences and the high court precedent would help a non-resident, Shah said.