Deemed Resident as per Section 6(1A) Income Tax Act

Section 6(1A) of the Act

A new sub-section (1A) to Section has been inserted with effect assessment year 2021-22 to provide that notwithstanding anything contained in sub-section (1), an individual, shall be deemed to be resident in India in any previous year if the following conditions are satisfied:

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1. The individual is a citizen of India;
2. His total income (excluding income from foreign sources) exceeds INR 15 lac during the previous year;
3. He is not liable to tax in any other country or territory; and
4. He is not so liable by reasons of-
   1. his domicile; or
   2. residence;
   3. any other criteria of similar

For the removal of doubts, it is clarified that the sub-section (1A) shall not apply in case of an individual who is said to be resident in India in previous year under sub-section (1) to Section 6.

As per memorandum explaining the provisions of Finance Act, 2020 the issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen not to be liable for tax anywhere in the in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

This amendment is an anti-abuse provision to tax “stateless persons”. The individual who satisfies the aforesaid conditions would be deemed to be a resident even if has not stayed in India for a single day in the relevant previous year.

The individual covered by Section 6(1A) will be deemed to be “resident but not ordinarily resident” under Section 6(6) of the Act.

If a person, who was a citizen of India, becomes a citizen of other country, he will not be covered by Section 6(1A) even if he is not liable to tax in that country. Further, this provision will not apply to a PIO.

Section 6(1A) applies only if an individual is not liable to tax in any other country. Most of the countries in the Middle East do not levy any tax on individuals. As a result, Indian citizens employed in these countries may become deemed resident under the above criteria since they would not be liable to tax in middle eastern countries. However, as a relief to millions of Indians employed in middle eastern countries, the Central Board of Direct Taxes (CBDT) has issued a press release on 2 February 2020 clarifying that the above provision is an anti-abuse provision and is not intended to tax bonafide workers in foreign countries.

The phrase ‘liable to tax’ is subject matter of interpretation. Does the individual have to actually pay tax in that country for being regarded a liable to tax? The Supreme Court in the case of UOI v. Azadi Bachao Andolan (132 Taxman 373) has held that merely because exemption has been granted to respect of taxability of particular source of income, it cannot be postulated that the entity is not liable to tax. Liability to taxation is not the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. Although the above observations were made by the Supreme Court in the context of a Double Tax Avoidance Agreement (DTAA), they would equally apply to Section 6(1A) of the Act. Therefore, the expression ‘liable to tax’ does not necessarily imply that the person should actually be liable to tax in the other country and that it is enough if other country has right to tax such person, whether or not such a right is exercised.

Section 6(1A) provides relaxation for Indian citizens who do not earn substantial income in India (i.e. total income (excluding income from foreign sources) upto INR 15 lac. In the above presee release the CBDT has further clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.

Model Conventions (OECD and UN) give the definition of resident in positive manner inasmuch as a person who is liable to tax in a State by reason of his domicile, residence or any other criteria of similar nature is a resident of that State; whereas Section 6(1A) defines a ‘resident’ in a negative manner, that is, a person who is not liable to tax in any other country by reason of his domicile or residence or any other criteria of similar nature.

Significantly, any individual who is treated as a “deemed resident” may not be eligible to avail benefits under any tax treaty entered into by India, as he/she may not qualify as tax resident of any other country. However, he/she may still be able to avail the benefit of foreign tax credit (FTC) in India of some of the taxes paid in other countries on income, which is also getting taxed in India.

Typically, countries have followed residence based tax system and/ or source based tax system or a balanced mixture of both. Presently, only two countries in the world levy tax based on citizenship – the US and Eritrea. As a departure from the normal rule, the Section 6(1A) seeks to treat an individual as an Indian tax resident based on citizenship rather than on residence or period of stay in India. The element of nationality or citizenship is now relevant for the purposes of determining the residential status of an individual taxpayer. Interestingly, such a provision, if applied to all Indian citizens (who do not pay taxes in their respective country of residence) can be characterized as a tax on citizenship.

The effects of the above amendments will now to be examined in various other provisions under the Act, which are discussed in following paras.

Scope of Total Income

As per Section 5(1) of the Act the total income of an individual who is resident and ordinarily resident includes all income form whatever source derived which-

1. is received or is deemed to be received in India in such year by or on behalf of such person; or
2. accrues or arises or is deemed to accrue or arise to him in India during such year; or
3. accrues or arises to him outside India during such year

In the case of a person not ordinarily resident in India, the income which accrues or arises to him outside India shall be so included only if it is derived from a business controlled in or a profession set up in India.

Section 5(2) provides that the total income of any previous year of a non-resident individual includes all income from whatever source derived which-

1. is received or is deemed to be received in India in such year by or on behalf of such person; or
2. accrues or arises or is deemed to accrue or arise to him in India during such

Thus, before the amendment, an individual who is now a deemed resident would have been regarded as non-resident and would have been taxed only on his Indian income. Now in view of the above amendments such an individual will now be taxed on Indian income plus income which accrues or arises to him outside India if it is derived from a business controlled in or a profession set up in India. Therefore, the distinction between an ‘ordinarily resident’ and a ‘resident but not ordinarily resident’ is important since in the case of former, global income is taxable in India and in later case, Indian income plus income which accrues or arises to him outside India if it is derived from a business controlled in or a profession set up in India will only be taxed in India.

Disclosure of the Assets outside India Section 139(1) provides that every individual shall furnish his return of income if his total income exceeds the maximum amount not chargeable to income tax. As per fourth proviso to Section 139(1) a person, being a resident other than not ordinarily resident in India within the meaning of Section 6(6), who is not required to furnish a return under this sub-section and who at any time during the previous year holds, as a beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside India or has signing authority in any account located outside India or is a beneficiary of any asset (including any financial interest in any entity) located outside India is required to furnish his return of income in India alongwith the disclosure of the assets outside India.

As the fourth proviso to Section 139(1) applies to a resident and ordinarily resident not to a resident but not ordinarily resident, a deemed resident will not have to disclose the details of foreign assets as required under the said proviso.

Similarly, the provisions of Sections 49 and 50 (rigorous imprisonment and fine for non- disclosure of foreign assets) of the Black Money (Undisclosed Foreign Income and Asset) and Imposition of Tax Act, 2015 would not be applicable to deemed resident.

Provisions related to tax deduction at source (TDS)

Certain TDS provisions are applicable to a payee, who is a resident, viz, Section 193 (interest on securities), Section 194 (dividend), Section 194A (interest  other  than interest on securities), Section 194C (payment to contractors), Section 194DA (payment in respect of life insurance policy), Section 194I (rent), Section 194IA (payment on transfer of immovable property), Section 194J (fees for professional or technical services), etc. All these provisions would now be applicable if the payment is made to a deemed resident. The provisions of Section 195 would not be applicable if the payment is made to a deemed resident.

Transfer Pricing Regulations

The transfer pricing provisions apply to an international transaction between two or more associated enterprises out of which atleast one is a non-resident. Prior to the insertion of Section 6(1A), an individual now regarded as deemed resident was regarded as a non-resident and hence, any transaction undertaken by him with a resident in India was an international transaction which was subject to the transfer pricing regulations. Now post amendment such non-resident person will become a deemed resident and therefore, the transfer pricing provision would not apply to an international transaction undertaken by such deemed resident. The transaction between the deemed resident and another non-resident will continue to be subject to transfer pricing provision.

Concessional Tax Regime – Chapter XII-A

Chapter XII-A provides special concessional provisions relating to certain income of non- residents. A ‘non-resident Indian’ being an individual, being citizen of India or PIO, who is not a resident of India is entitled for concessional rate of tax under Chapter XII-A. Now, since the individual covered by Section 6(1A) is deemed to be a resident, he will be able to claim concessional provision in Chapter XII-A only if he opts for a declaration under Section 115H; the said section provides that where a non-resident Indian in any previous year becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the assessing officer a declaration in writing alongwith his return of income under Section 139 for the assessment year for which he is so assessable, to the effect that the provisions of Chapter XII-A shall continue to apply to him in relation to the income specified in Chapter XII-A and if he does so, the provisions of the Chapter shall continue to apply to him in respect of such income for that assessment year and for every subsequent assessment year until the transfer or conversion (otherwise than by transfer) into money of such assets.

Conclusion

Globally, consensus have reached against taxpayers who manage to avoid or substantially reduce their global tax burden by spreading their stay or businesses across different tax jurisdictions. This highlights the intention of tax departments across the world in this regard. The new residency rule is an anti-abuse provision planned to plug loopholes in the system and not intended to tax income earned by those working bonafide overseas. If a genuine non-resident Indian is earning something in a jurisdiction where there is no tax, the government is not interested in including such income into Indian income that has been generated there. The recent law relating to “deemed resident” is a significant step taken by India to address the challenges faced in bringing “stateless” persons to tax. However, it will be interesting to see how the Indian tax department implements and enforces this law against non-resident individuals.