The last 12 months have resulted in people facing challenges and difficulties coming at them from all sides, and often all at once. At the very inception of the lockdown in late March, 2020, a panic had set in amongst a large number of NRIs and PIOs stuck in India, despite wishing to leave the country to avoid becoming tax resident in India.
The CBDT came out with a welcome Clarification on 8th May, 2020 vide Circular No. 11/2020 and provided relief to such persons becoming accidental and unintentional residents. The accompanying press release, dated 9th May, 2020, provided further assurance from the Government that relief for F.Y. 2020-21 would be given in due course of time.
‘Further, as the lockdown continues during the Financial Year 2020-21 and it is not yet clear as to when international flight operations would resume, a Circular excluding the period of stay of these individuals up to the date of normalisation of international flight operations, for determination of the residential status for the previous year 2020-21, shall be issued after the said normalisation.’
By the time of the actual normalisation of international flight operations, the 182-day mark had already been crossed, thereby resulting in a situation in which a non-resident who was stranded in India due to the lockdown became a tax resident for F.Y. 2020-21. There was indeed a pressing need for a proactive step from the Government to provide a breather to such people stranded in India, or to instruct the CBDT to issue the necessary guidelines for them. However, our Government, recognising tax as a major source for revenue, felt it appropriate to leave the matter untouched and was busy in other priority matters not concerning the hardship that people would face. Accordingly, people had to make several representations to the Government for clarity, since the so-called commitment to issue a relief-granting Circular was never met, nor any statement or indication given by the Government as to its plans.
Finally, after multiple representations to the Government, an SLP had to be filed before the Supreme Court. While hearing the SLP filed by an NRI who gained involuntary residency in India, the Court pronounced that the CBDT was the appropriate body to grant relief and directed it to issue a Circular within three weeks. But despite all these efforts, the CBDT came out with an ineffective Circular and reasoning. On the international platform, the Government is trying to co-operate with OECD countries to tackle tax nuances whereas, on the other hand, this action of the Government reflects its fickle mind-set in relation to tax levy. It is important for the Government to understand that ‘trust is earned when actions meet words’. They should learn from the ancient days when kings collecting bali from the people were considerate not to collect such bali during the periods of drought / floods.
Circular No. 2/2021 was issued on 3rd March, 2021 and instead of granting any relief or concession, as was expected, it was merely a summarisation of the existing provisions of section 6 of the Income-tax Act, 1961 (‘ITA’) and a short explanation of how Articles 4 and 16 of the India-US tax treaty work, amongst other things.
What was the CBDT trying to clarify through this Circular – the provisions of the ITA and the Tax treaty, or guidelines for stranded people in India? It is a perfect example of how CBDT easily discharged its obligation without considering the practical applicability of the Circular. No relief through this Circular means that non-residents have to again make representations and file SLPs before the due date to file returns in India, resulting in prolonged litigation for these NRIs. It is believed that this Circular will severely harm NRIs stranded in India.
On an examination of the reasons in the Circular for not granting any relief, the following points emerge:
ONE. There is no ‘short-stay’ in India
The first reason given by the Circular for not granting relief was that a ‘Short stay will not result in Indian residency’. This reason shows that the CBDT has not considered the situation that by the time international flights were normalised and stranded NRIs could leave the country and return to their country of usual residence, they had already exceeded the threshold of 183 days’ stay in India and become residents. Therefore, for most persons who were stranded in India as on 1st April, 2020 the terminology of a ‘short stay’ in India during F.Y. 2020-21 introduced by the CBDT is highly irrelevant, especially as it was evident that NRIs were forced to remain in India till at least July (when limited flights to the US and France were commenced) and in most other cases till October. Further, in case of several other countries such as Hong Kong and Singapore, flights have yet not resumed.
TWO. Possibility of dual non-residency is no reason for not granting relief
The Circular, while further explaining the rationale for not granting relief, raised an issue which has become a hot topic and a sore point for the Indian Government – the inequity and injustice of double non-taxation. The Indian Government has been focused on non-residents, especially NRIs, avoiding tax in India by ‘managing’ their residential status to remain outside India. Section 6 was significantly amended to tackle this scourge on the Indian exchequer. The Circular states that granting relief for the forced period of stay in India could result in a situation where ‘a person may not become a tax resident in any country in F.Y. 2020-21 even after staying for more than 182 days or more in India resulting in double non-taxation and end up not paying tax in any country.’ Therefore, the Government deems it fit to not grant any general relief.
Never mind that this aspect was not considered relevant while granting relief for F.Y. 2019-20, or that the Government had already committed to granting relief in May, 2020.
Coming back to the reasoning, even if a person ends up becoming a ‘stateless’ person (if relief were hypothetically provided), they would then be unable to seek recourse to any beneficial position under a tax treaty and have all their India-sourced income subject to tax in India anyway. The only tax revenue that the Indian Government would forgo would be in respect of foreign-sourced income, which anyway it has no right to tax. The reasoning defines the intention of the CBDT to tax global income of the NRI stranded in India due to the lockdown. Is the Indian Government morally right to levy tax on such foreign-sourced income under the ‘residence-based’ taxation rules?
Clearly, the answer to this must be an emphatic ‘No’. However, the knife is in the hands of the Indian Government and they would try to tax (i.e., cut) everything which comes their way in the name of legitimate tax collection. Just because NRIs have got stranded in India due to the lockdown by virtue of which they became residents in India satisfying the condition of section 6, the Government feels it has the right to tax their worldwide income. This shows that the Government interprets Indian laws as per its convenience. Further, if the source-country has ‘source-based’ taxation rules like India, then it will levy tax on such income, irrespective of the fact that the income-earner is a non-resident there. If the source-country has given up its right to tax such income arising and originating therein, then that should be of no concern to the Indian Government and remain a matter solely relevant to that Sovereign State.
It is also unfair for the involuntary period of stay in India to be considered while determining residential status. The Delhi High Court in its decision in CIT vs. Suresh Nanda [2015] 375 ITR 172 has articulated this point very well as follows:
‘It naturally follows that the option to be in India, or the period for which an Indian citizen desires to be here, is a matter of his discretion. Conversely put, presence in India against the will or without the consent of the citizen should not ordinarily be counted adverse to his chosen course or interest, particularly if it is brought about under compulsion or, to put it simply, involuntarily. There has to be, in the opinion of this Court, something to show that an individual intended or had the animus of residing in India for the minimum prescribed duration. If the record indicates that – such as for instance omission to take steps to go abroad, the stay can well be treated as disclosing an intention to be a resident Indian. Equally, if the record discloses materials that the stay (to qualify as resident Indian) lacked volition and was compelled by external circumstances beyond the individual’s control, she or he cannot be treated as a resident Indian.’
Besides, the newly-inserted section 6(1A) should have automatically addressed the concerns of the Indian Government of double-non-taxation of ‘stateless’ Indian citizens, if that is the thinking behind non-granting of relief.
The Indian Government seems to be taking a position that because some persons may get too much of a benefit, no relief should be granted to anyone, a position which is both disingenuous and inconsistent. By granting relief, the Indian Government would not have done any favour; instead, it would simply be forgoing a right it normally would, and should, never have had in the first place.
In addition to exposing the income of stranded foreign residents to tax in India, they shall be burdened with the additional responsibility of the disclosures and compliances in India as applicable to residents. In case the foreign assets’ disclosures are not made by such persons, then the Indian Assessing Officer has been given unfettered powers under the Black Money Act wherein he can levy penalties and prosecutions.
Further, they would also lose the benefit of concessional or beneficial tax provisions available to non-residents both under the ITA and a tax treaty. And, if they are engaged in a business or profession outside India or take part in the management of a company or entity outside India, they would risk the income arising to them through such business or profession becoming taxable in India, or the company being considered a resident in India by virtue of its place of effective management being in India. Compliances with tax audit provisions, transfer pricing provisions, etc., also become applicable to such persons and their business transactions when they become resident in India. Additionally, whatever payments such persons would make, whether personal in nature or for their business or profession, would also be subject to evaluation for taxability in India – for example, if a person who becomes resident in India due to being stuck here during the lockdown makes royalty payments in respect of his foreign business to a non-resident, then such royalty would be deemed to accrue and arise in India and be chargeable to tax in India.
These follow-on consequences of becoming a resident are completely ignored by the Government while evaluating the impact of not granting relief, since there is nothing which is going from its pocket instead of falsely piling up the case for taxing such income.
THREE. No tie to break
The Circular explains that the tie-breaker test under tax treaties will come to the rescue of dual-residents. This clarity completely misses its own stand as stated in the Circular in the earlier section, that if someone becomes a resident of India by virtue of their period of stay in India, they will not be able to access the tie-breaker test of the tax treaty because they may not qualify as residents of the country of their usual or normal tax residency. So, how would the tie-breaker test come to the rescue? The Government should take the trouble to explain in detail the difference in stand taken by it in the same Circular. Was the Circular drafted by two different persons applying their minds independently? Further, India does not have a tax treaty with each and every country and any person who is resident of such a country with which India does not have a tax treaty would have no such recourse available, even if he were to become a dual resident. In case of any non-compliance, the Government comes with retrospective clarifications to tax such people. Isn’t this a kind of tax terrorism?
The Circular further states that: ‘It is also relevant to note that even in cases where an individual became resident in India due to exceptional circumstances, he would most likely become not ordinarily resident in India and hence his foreign sourced income shall not be taxable in India unless it is derived from business controlled in or profession set up in India.’
If this is indeed the case, and eventually relief will anyway be granted by operation of the tie-breaker test or MAP (Mutual Agreement Procedure), or foreign source income will anyway not be subject to tax in India, then there should be no reason for the Indian Government to not grant relief pre-emptively and reduce the genuine hardship and burden on accidental residents. By the very reasoning adopted in the Circular, granting relief will not confer any additional benefit upon anyone and therefore the Government should not have had any reluctance and objection to granting such relief.
The issue of tie-breaker also raises the practical difficulty in claiming tax treaty based on non-residential status while filing the return of tax (‘ITR’) in India. There is no provision in the ITR for individuals to claim status as tax treaty non-residents if they are residents under the provisions of the ITA. It has become mandatory to provide details of period of stay in India in the ITR and, therefore, issues shall arise in cases where stay in India exceeds 182 days but the tie-breaker results in non-residence in India.
In such cases, the options are that the filer simply claims all foreign source income as exempt even though his status is disclosed as a resident, or the filer does not fill in the period of stay and files as a non-resident. Filing as a resident may expose him to the need to make unnecessary additional disclosures and compliances, such as in respect of foreign assets. However, if such disclosures are rightly not made, this may attract additional scrutiny and also the potential for proceedings under the Black Money law. Even if the proceedings may not eventually result in any consequence, the nuisance and additional effort and financial burden due to the scrutiny will nonetheless arise. Filing as a non-resident without providing details of period of stay may result in the ITR being considered defective, which has its own consequences. In the absence of any changes to the ITR or clarification on this subject from the CBDT, the fact that such difficulty has not been addressed will add to the anguish and confusion.
FOUR. Employment income
The Circular reiterates the current legal position that employment-related income of an accidental resident will only be subject to tax in India if his stay exceeds 183 days in India or if a PE of the foreign employer bears the salary.
Therefore, the Circular itself acknowledges the fact that many persons will be in India for 183 days or more when it talks about dual non-residency, (but) it ignores this very aspect while discussing taxation of salary and wages.
The salary structure of any employee is designed based on the applicable taxation and labour laws of the jurisdiction where the employee was expected to be exercising his employment. The tax deductions and taxability of perquisites, employment benefits such as pension, social security and retirement benefit contributions, stock options and similar reward schemes, etc., vary greatly from country to country and the calculation is extremely sensitive to the specific tax considerations under which the remuneration package was designed.
Therefore, all those persons stuck in India and exercising their employment in India will unnecessarily have their employment income subjected to tax in India. While there may not be an instance of double taxation, there surely will be instances of unforeseen and unexpected tax consequences on account of differing tax treatments and employment-related tax breaks not being available in India as against the jurisdiction of the employer.
Not merely this, the rates of tax applicable in India may be much higher than the rates of tax applicable in the person’s home country, and given the relatively weaker purchasing power of the Indian Rupee, it is likely that a major portion of the employment-related income would be subject to tax under the 30% tax slab, while the income would not have been subject to such high rates of tax in the home country. This will have a serious cash flow impact due to the additional tax liability to be borne in India.
FIVE. No credit-worthiness
This brings up the next matter which the Circular addressed, i.e., credit of foreign taxes. The Government’s argument is that even if there is a case of double taxation, credit of foreign taxes would be available in India as per Rule 128.
This ignores the concern of many of the accidental residents, that the real problem may not be double taxation but the overall rate of taxation. If the foreign tax liability and effective rate of tax is greater that the Indian rate of tax, there would be no concern. However, in most cases the Indian rate of tax is higher due to which even after eliminating double taxation there would be an additional tax cost borne in respect of Indian taxes. In this respect, the CBDT in its Circular could have clarified that such additional burden shall be refunded to the people taxed overly. On a serious note, if you want to tax people considering a certain scenario, then the Tax Department should also consider a scenario in which it has to refund money to them.
Apart from this, the elimination of double taxation through tax credit is irrelevant to the many Indian emigrants living and working abroad in lower tax or zero-tax rate countries such as the UAE, Bahrain, Oman, Qatar, Kuwait, Bahamas, Singapore, Cyprus, Mauritius, Hong Kong, etc. In such a scenario, the Indian Government is taxing something which it never had the right to tax. Clearly, the Government is taking undue advantage of the pandemic by deriving revenue from the stranded people.
SIX. International inexperience
The Circular then goes on to quote from the OECD Policy Responses to Coronavirus (Covid-19), which stated that the displacement that people would face would be for a few weeks and only temporary and opined that acquiring residency in the country where a person is stranded is unlikely.
This reference to the OECD’s analysis is of 3rd April, 2020, less than a week into India’s lockdown. The Circular relying on a projection in April, 2020 of people being stranded for a few weeks only is absurd given that this Circular is issued in March, 2021 and it is abundantly clear that people were stranded for several months (or even a year) and in almost all cases acquired residency in India.
A majority of OECD countries are in Europe where inter-country and cross-continental travel by road is fairly common and convenient due to the short distances involved. If a person working in France gets stranded in the Netherlands or Belgium, he could simply travel back to France by his own private car – this convenience is surely not available to a person working in the US and stranded in India.
If the Government really did want to rely on international experience to justify its actions, it should have fallen back on something more recent, which considers the situation as it is today, not on what it was in April, 2020 and definitely not an invalidated forecast from the past.
The Circular then mentions what other countries have done and states that the UK and the USA have provided an exclusion or relief of 60 days, subject to fulfilment of certain conditions, while some countries have not provided any relief or have undertaken to provide relief based on the circumstances of each case. The Indian tax authorities often argue that India is not bound by the actions, decisions and interpretations of other countries. This is done especially while denying benefits or adopting positions that are not aligned with the international experience and best practices. Conveniently in this case, the CBDT has taken its cue from international experience!
What is also relevant is the difference in circumstances between India and the other countries. A large number of Indians normally reside and work in other countries – estimated to be more than 13 million NRIs / PIOs globally. The US, the UK, Germany or Australia are more likely to host foreign citizens than have their own citizens working and living overseas. Therefore, these countries are less likely to be concerned about their emigrants accidentally re-acquiring residency under their domestic tax laws from being stranded due to the lockdown. The Indian Government, however, ought to have been more considerate to the plight of some of these 13 million people.
Another argument relied upon by the Circular is the position adopted by Germany which has held that ‘in the absence of a risk of double taxation, there is basically no factual inequity if the right to tax is transferred from one contracting state to another due to changed facts.’
However, this presumes that the taxation system and tax burden faced by the person in either jurisdiction will be similar or comparable. As has been argued above, there are real possibilities that accidental residents will suffer a much greater tax burden as compared to what they would have suffered had they continued to reside in the country of normal residence.
CONCLUSION
The position of the Government is correct to the extent that there are reduced chances of double taxation and that double taxation through dual residency can be mitigated and relieved through operation of tax treaties and credit for foreign taxes. The Circular also provides that persons suffering double taxation and not receiving relief can make an application to the CBDT for specific relief. It, however, ignores several other issues.
It neither acknowledges nor addresses the concerns of the large number of NRIs and PIOs who are normally residing in lower tax or zero-tax jurisdictions and will suffer a much higher tax burden only because an unforeseen global lockdown forced them to be physically present in India. It also ignores the implications arising out of residency in India that go beyond being subject to tax in India.
There would be a large number of persons who were resident in India previously but have recently emigrated to another country, but they become not just resident but also ordinarily resident in India because of their current year’s presence along with their past status and stay. This exposes their global income to tax in India, which is patently unfair.
Such forced residential status may also require them to disclose all their foreign assets in India and if they are unable to do so accurately and exhaustively, it exposes them to implications under Black Money law and severe non-disclosure related penalties. It will also restrict their access to beneficial tax provisions available to non-residents under the ITA simply because they were stranded in India.
Most importantly, however, none of the arguments made by the CBDT in the Circular are new or were not already known before. They were also known in May, 2020 when the Government provided relief for F.Y. 2019-20 and explicitly committed that it would issue a Circular to provide relief in respect of the period of stay in India till the normalisation of international flights.
The second petition filed against the Circular before the Supreme Court by the same NRI who had filed the original SLP makes the argument that the Government is obligated to provide relief based on its earlier promise. It relies on the Supreme Court’s ruling in the case of Ram Pravesh Singh vs. State of Bihar that there was a legitimate expectation of relief based on the fact that under similar facts relief had been provided for F.Y. 2019-20 and it had been promised for F.Y. 2020-21. The doctrine of ‘legitimate expectations’, although not a right, is an expectation of a benefit, relief or remedy that may ordinarily flow from a promise or established practice. The expectation should be legitimate, i.e., reasonable, logical and valid. Any expectation which is not based on established practice, or which is unreasonable, illogical or invalid cannot be a legitimate expectation. It is a concept fashioned by courts for judicial review of administrative action. It is procedural in character based on the requirement of a higher degree of fairness in administrative action, as a consequence of the promise made, or practice established. In short, a person can be said to have a ‘legitimate expectation’ of a particular treatment if any representation or promise is made by an authority, either expressly or impliedly, or if the regular and consistent past practice of the authority gives room for such expectation in the normal course.
In addition to this, the petition argues that the Circular is unconstitutional because it violates the principle of equality before law under Article 14 – there is inconsistency in not granting relief for F.Y. 2020-21, although under similar circumstances relief had been granted for F.Y. 2019-20. Another argument is that not granting relief from being a non-resident violates Article 19 because it interferes with the freedom to practice a trade or profession and places undue restrictions on the same. Lastly, it argues that the Constitution guarantees protection to life and personal liberty and the lockdown was a force majeure situation, where the appellant was forced to remain in India in order to protect his life and liberty – the Circular penalises him for merely exercising this Constitutional right because, if not for the pandemic, he would have travelled back to the UAE and not remained in India.
The fresh petition makes other arguments which have also been made here to seek justice from the Supreme Court in the matter. The CBDT was also possibly aware that it may have to provide additional relief since it has stated in the Circular that based on the applications that will be received it shall examine ‘whether general relaxation can be provided for a class of individuals or specific relaxation is required to be provided in individual cases’. We can only hope that given the almost universally negative response to the Circular, the CBDT relents and provides the much needed, and previously promised, general relief and exclusion. Else, the soon-to-be-heard petition seems to be the last resort for any equitable relief for the NRI and PIO community.
