India clarifies tax residency of ‘visiting’ individuals stuck in lockdown

By Ritu Shaktawat, Partner, Khaitan & Co, Mumbai, India

India’s government on 8 May issued a tax circular providing much needed relief to individuals who visited India in 2019-20 but had to prolong their stay due to lockdown and suspension of international flights. 

The clarification seeks to address the concerns of individuals who, due to a prolonged stay, may end up becoming Indian tax residents without intending to do so.    

Under the Indian tax residency rules, an individual is considered a resident of India for a particular year if he or she has spent a certain number of days in India in that year (April – March).

Further, depending upon the stay in the years preceding the relevant year, the residential status is further categorized as ‘ordinarily resident’ (taxed in India on their worldwide income) and ‘not ordinarily resident’ (taxed only on Indian-sourced income).

To contain the outbreak of the novel Covid-19 virus, India had declared a nation-wide lockdown and restricted all incoming and outgoing international travel after 22 March. This must have led to situations where individuals who had come to India on a visit and intended to leave before the year-end (31 March) had to prolong their stay.

To avoid hardship, the government has now clarified that, for the year 2019-20, an individual who visited India before 22 March but was unable to leave India on or before 31 March, the period of stay in India from 22 March to 31 March will not be taken into account for determining his or her tax residential status.

Further, if an individual has departed on an evacuation flight on or before 31 March, his period of stay from 22 March to the date of his or her departure will not be considered.

Furthermore, in case of those visiting individuals who have been quarantined in India on account of Covid-19 on or after 1 March, and that left India on an evacuation flight on or before 31 March or that have not been able to leave India by 31 March, then the period of stay of such individuals beginning from the date of quarantine to the date of his or her departure or 31 March, as the case may be, will not be counted for tax residency.

The circular marks a timely step by the government in clarifying the position that unintended and prolonged stay due to lockdown and related travel restrictions should be disregarded for determining tax residency.

The OECD had also recently issued a guidance note, inter alia, on the determination of tax residency status of individuals who are stranded in a country in light of the global pandemic crisis.

The guidance note advised that tax authorities to consider a “more normal period of time when assessing a person’s resident status.”

India continues to be in lockdown and has suspended international flights until 17 May. Whether these restrictions are eased or extended would be known in a few days.

Since India’s tax year is 1 April to 31 March, the circular is restricted to the determination of tax residency for the year 2019-20. However, in a press release, the government clarified that a circular along similar lines will be issued to clarify the position with respect to 2020–21 once the situation normalizes and international flight operations resume. 

It is important to note that the relaxation has been provided only to individuals who had come to India on a “visit” – which is a factual question and has been a subject of dispute.

Shabnam Shaikh, Principal Associate, contributed to this article.

Ritu Shaktawat

Ritu Shaktawat

Partner in the direct tax practice at Khaitan & Co

Ritu is a Partner in the tax practice at Khaitan & Co, a full service law firm in India. With over a decade in the profession, Ritu has advised clients in the areas of corporate and international taxation.

She focusses on matters involving transaction tax advisory, structuring and documentation of domestic, cross-border and global M&A deals having an India leg; complex interpretational issues pertaining to income characterisation and permanent establishment aspects; taxation of EPC contracts; taxability of the ever-evolving e-commerce business models; and funds taxation.

Over the years, Ritu has developed a deep understanding of transactional tax issues, which she supplements with cutting edge practical inputs.

Ritu Shaktawat

Ritu Shaktawat

Khaitan & Co

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