The COVID-19 pandemic has had an unprecedented impact on economic activity across the world. With international travel restrictions, individuals have been unable to travel overseas and have run the risk of triggering India tax residency issues. The Central Board of Direct Taxes (CBDT) has clarified that such stay in India during the lockdown period will not be counted for determining tax residency for the financial year 2019-20. India’s residency views are similar to the position advocated by the OECD and many other jurisdictions.
India determines tax residency based on the number of days an individual is physically present in India during the financial year. According to the circular, individuals who had come to India on a visit can disregard their stay during the lockdown period in FY 2019-20 (22 March 2020 to 31 March 2020) to determine residency. In addition, individuals quarantined on or after 1 March 2020 can exclude their stay from the start of quarantine to the date of departure from India or 31 March 2020, as the case may be.
Individuals who had left India on an evacuation flight on or before 31 March 2020 can also exclude their period of stay from 22 March 2020 to date of departure. For those who are benefited by this circular, it is advisable to maintain sufficient documentation on travel, quarantine and on evacuation.
Estimates reveal that more than 17 million Indians were working outside India in 2019. Many nations have enforced lockdowns and travel restrictions, among other safety measures to fight COVID-19. Many NRIs have returned to India even before lockdown and are working from India for their foreign employers, as they want to be with family during these times. NRIs have been spending an overwhelming portion towards temporary relocation to India, for instance, on emergency flights, accommodation in both locations, damages towards foreclosure of leases. Applicability of India tax on their overseas employment income will certainly cause hardship to such NRIs. While such scenarios may be more applicable to NRIs, other Indians working overseas and foreign nationals who are stranded in India will also be similarly impacted.
While some of the hardship has been overcome with the recent CBDT notification, outlined below are some of the unanswered questions, which the government needs to address to mitigate potential tax exposure, to individuals and employers.
1. There could be multiple patterns such as NRIs from non-treaty countries, individuals breaking residency in work locations due to extended stay in India. A specific clarification that overseas employment income will not be taxable for NRIs staying back in India would provide great relief.
2. Foreign employers have allowed employees to work from India considering the exceptional situation in their countries. Employees working in India could create unintended consequences for foreign employers in the form of Permanent Establishment. Once a foreign employer is determined to have a Permanent Establishment in India, employees will not be able to claim exemption during their stay period. While OECD clarifies that companies may not assume Permanent Establishment under force majeure circumstances, a similar clarification from the government would be opportune.
3. A foreign company would be presumed to have a place of effective management (POEM) in India if majority of the key stakeholder meetings are held in India. A few board meetings or decisions of foreign companies may happen from India during the lockdown period or thereafter, if senior executives are not in a position to travel overseas for meetings. While companies could apply the tie-breaker clauses in the treaty to arrive on the issue of residency, the risk for a foreign company from a non-treaty country, would be high. The OECD, the Australia tax office and Ireland’s Revenue have clarified that presence of individuals or conducting board meetings in a country due to international travel restrictions, need to be ignored to determine the place of effective management. An express clarification from the tax office will give comfort to the foreign companies.
In summary, the CBDT circular provides relief to those stranded in India during FY 2019-20. The CBDT has also tweeted that another circular for FY 2020-21 will be issued once the travel ban is lifted. An extended residency relaxation for NRIs and other stranded individuals over and above the lockdown period and consequential clarification on corporate positions will help India strengthen her position of ‘Doing business in India’, despite the challenging times during COVID-19.