Residency under the Indian tax and exchange control law
Residency under the India tax and exchange control regulations is predominantly determined basis the number of days an individual is present in a country. During financial year 2020-21, the Central Board of Direct Taxes (CBDT) has issued some clarifications from a tax perspective to determine the residential status of individuals who have overstayed due to covid-19 in India. The clarifications provided to address genuine hardships from tax perspective, however, do not have utility in determining the residential status of an individual under the exchange control regulations, as the criteria prescribed for ascertaining residency under these regulations are different.
Under India’s tax laws, a person is a resident in a particular tax year, if he fulfils either of the following conditions:
* If he stays in India for a period of 182 days or more in a financial year (1 April to 31 March of the following year); or
* If he stays in India for a period of 60 days or more in a financial year and if he has stayed in India for a period of 365 days or more during the 4 years immediately preceding the relevant financial year.
However, a relaxation is provided to Indian citizens and Persons of Indian Origin, who are outside India and come on a visit to India. For them, the 60 days threshold has been replaced with 182 days except where their total income in India exceeds `15 lakh, in which case, this relaxation is reduced to 120 days.
Further, new deemed tax residence rules have been implemented from financial year 2020-21 in India beginning from 1 April 2020, whereby Indian citizens not liable to tax in any other country by virtue of their domicile or residence, or similar criteria, will be deemed to be resident in India, provided their total income in India exceeds `15 lakh. However, such citizens would be considered as “Resident but Not Ordinarily Resident”. Accordingly, their India sourced income and income earned from any business controlled/profession set up in India shall be taxable in India.
Under the exchange law, an individual is said to be resident in India, if he has been in India for more than 182 days in the preceding financial year. However, the following persons are not deemed to be resident in India even if they have been in India for more than 182 days in the preceding financial year:
* Persons who have come to, or stays in India otherwise than for taking up employment in India or to carry on any business in India or with an intention to stay in India for an uncertain period.
* Persons who have gone outside India for taking up employment or to carry out any business outside India or has an intention to stay outside India for an uncertain period.
Though the definitions under the tax and exchange control law use 182 days as a common threshold, there is a significant difference between the criteria. The definition of residence under the tax law is based on number of days of stay in India. Purpose and intent have limited relevance. In contrast, under the foreign exchange law, the purpose and intent of stay in India are also to be considered.
Impact on account of change of residential status
Due to the different definitions under the two laws, a person who is a resident under the tax law may not necessarily qualify as a resident under the exchange control law. Determination of residential status is integral to understand the scope and applicability/non-applicability of the exchange control provisions to a person. In case the residential status of the individual gets altered on account of the above-mentioned conditions, there would be far-reaching implications on the cross-border remittance facilities available to individuals which would merit consideration.
For example, currently, a non-resident can remit up to $1 million overseas per financial year (April to March) from his Non-resident Ordinary Rupee (NRO) account, which is generally opened by non-residents to receive income earned in India. In contrast, resident individuals can remit an aggregate sum of $250,000 per financial year for any permissible transaction as per the Liberalized Remittance Scheme (LRS) under the automatic route. Erstwhile non-resident individual, qualifying the threshold of residency in financial year 2020-21 due to an extended stay in India, may now be considered as a resident and consequently the facility of remitting $1 million may not be available based on the strict interpretation of the law. Contra-distinguishably, Indian residents who are now staying overseas for the purpose of business/employment etc. may be eligible to remit overseas up to an enhanced limit of $1 million per financial year from India, subject to fulfilment of specified conditions.
Further, the permissible outward transactions under both the above-mentioned schemes are different:
* For non-residents, current income earned such as rent, pension, interest, etc. is freely repatriable outside India from the NRO account. Apart from current income, balances in the NRO account may be repatriated abroad only up to $1 million in a financial year. Repatriation of an amount more than $1 million may be permitted by Reserve Bank of India under the approval route in exceptional circumstances.
* Permissible outward transactions for residents include travel outside India, donations, gifts, maintenance of close relatives abroad, business trips, studies outside India, medical treatment abroad, purchasing immovable property abroad, foreign investments, rupee loan to Non-Resident Indian/Person of India Origin who is a close relative etc. Individuals can also open, maintain and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme.
Basis the above, like determination of residential status is important under tax laws, it is equally imperative to determine residential status as per the exchange laws. Individuals impacted adversely due to a mere overstay in India or overseas may approach the Reserve Bank of India for relief.
The outward remittances discussed above require multiple levels of reporting.
The purpose for which a remittance is affected is to be reported in the relevant filings. As per the extant exchange control regulations, there are no category-wise limits for remitting funds abroad. In case there are multiple reasons for transferring funds outside India, the provisions do not provide guidance as to how the reporting is to be carried out. However, based on practical experience, it is advisable that one should remit funds in multiple tranches selecting the specified reason for which funds are being transferred.
However, in case it is not feasible to transfer in multiple tranches for any reason, the broader/overarching reason should be mentioned while remitting the funds along with a letter that can be submitted to the bank intimating the usage of funds for multiple reasons. It is advisable to check with the bankers prior to the remittance as to the specific requirements. Further, in case there are transactions which mandate a prior approval from the Reserve Bank of India, the requisite compliances should be done before effecting the remittances.
While effecting remittances, a Form A2, a Chartered Accountant’s certificate in Form 15CB (as applicable) and a self-declaration in Form 15CA are required to be furnished to the bank, confirming that applicable taxes have been deducted and deposited into the government treasury. Further, bankers may also require a certificate attested by a Chartered Accountant that the money proposed to be remitted overseas is earned from genuine sources in certain cases.
Tax collection on overseas remittances
To widen the tax net, the government has also placed onus on the authorized dealers to collect taxes while effecting remittances under the LRS. Taxes shall be collected at the rate of 5% on remittances under LRS in excess of `7 lakh in a financial year through authorized dealer.
Further, in cases where amount remitted is towards pursuing education abroad out of loan obtained from financial institution, reduced rate of 0.5% shall be applicable on amount in excess of `7 lakh. The tax so deducted by the authorized dealers can be adjusted by the individual against his final tax liability while filing his income tax return.
Further, with effect from 1 July 2021, taxpayers who have not filed their tax returns for two preceding financial years and where the aggregate of tax deducted and collected at source is in excess of `50,000 in each of the two financial years, shall be subject to tax collection at the higher of the following rates:
a) Twice the rate specified in the relevant provisions of the Act; or
b) Rate of 5%
The above rates shall also be applicable in a case where the person does not have a permanent account number or Aadhaar, a unique 12-digit identity number that can be obtained by eligible individuals in India.
In view of the extensive tax and exchange control compliance and reporting requirements, it is imperative that due care be taken while effecting cross-border remittances especially during covid-19.
CA Nilpa Keval Gosrani and CA Viraj Doshi contributed to the article.
Vikas Vasal is national leader-tax at Grant Thornton Bharat LLP.