1. Changes in rules relating to determination of ‘residence’ in India

The scope of income of a person liable to tax in India depends upon his residential status in a particular financial year. Indian Income Tax Act 1961 (the Act) recognizes three statuses, namely, Resident and Ordinarily resident’ (ROR), ‘Resident but not ordinarily resident’ (RNOR), and Non-resident (NR). If a person is ROR then his global income is taxable in India; if he is a RNOR then only his Indian income and any income from any business or profession outside India which is controlled from India is taxable in India; and for NRs only their Indian income is taxable in India.

Three changes are proposed in Section 6 of the Act by Finance Bill 2020:

i) Under the existing provisions an individual is treated as ROR if his stay in India during the year is 182 days or more; OR if his stay in India within 4 preceding years is 365 days or more and his stay in India during the year is 60 days or more. However, as a relief for Indian citizens and Persons of Indian Origin an exception was provided that the second condition will trigger only if their stay in India is 182 days or more.

The Finance Bill proposes to reduce the period of 182 days in the exception clause relating to Indian citizens and PIOs to 120 days, on the ground that it was being misused.

ii) Under the existing provisions an individual or HUF is treated as RNOR if he (or the Karta of HUF) was a non-resident in India in 9 out of 10 preceding years or his cumulative stay in India is less than 730 days during 7 preceding years.

The Finance Bill proposes to replace this provision and instead provide that an individual or HUF will be RNOR if he (or the Karta of the HUF) was non-resident in India in 7 out of the 10 preceding years.

iii) The Finance Bill proposes a new category of ‘deemed residents’. This is defined to mean Indian citizens who are “not liable to tax in any other country or territory by reason of domicile or residence or any other criteria of similar nature.” The Explanatory Notes mention that this change is to include those individuals who change their residential status or shift to a tax haven to avoid payment of tax in India and who enjoy double non-taxation. In a subsequent Press Release dated 2nd February 2020 CBDT stated that the income earned outside India by ‘deemed residents’ shall not be taxed in India unless it is derived from business or profession in India. The Press release however does not appear to be in consonance with the current legal position. It is possible that the provision in Finance Bill may be modified before the Bill is passed.

2. Deferring the provisions of ‘Significant Economic Presence’

Income accruing to a non-resident from ‘business connection in India’ is taxable in India. In 2018 the definition of ‘business connection in India’ was expanded to include profits derived from ‘Significant Economic Presence’ in India. This was done to include profits of digital businesses which earned income from India without any physical presence in India. However, the relevant rules for computation etc. were not notified due to pending decisions on this issue in international forums.

Finance Bill 2020 now proposes to enlarge the definition of SEP, and to make the provision applicable from Assessment Year 2022-23 as discussions on this issue are still going on in G20-OECD BEPS project.

3. Enlarging the scope of income attributable to operations carried out in India

Under the existing provisions only that part of income arising to a non-resident from ‘business connection in India’ is taxable which can be attributed to its operations in India. In order to bring profits of international digital companies deriving profits from digital transactions in India in the tax net, the Finance Bill 2020 proposes to define ‘income attributable to operations carried out in India’, to include incomes from :-

(i) advertisement which targets a customer who resides in India or accesses the advertisement through internet protocol address located in India;

(ii) sale of data collected from a person who resides in India or uses internet protocol address located in India; and

(iii) sale of goods or services using data collected from a person who resides in India or uses internet protocol address located in India.

This amendment will take effect from 1st April 2021. In respect of tax residents of the countries with which India has entered into a tax treaty, this amendment will be subject to the provisions of the relevant treaty.

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