Section 6 of the Income-tax Act, 1961 (IT Act) deals with provisions relating to the residency of an individual. The residential status of an individual (i.e., “Resident and Ordinarily Resident” or a “Resident but Not Ordinarily Resident” or a “Non-resident”) depends, inter-alia, on the period of stay in India during the respective Fiscal Year (FY) and/or preceding FY(s). Due to outbreak of COVID-19, the Government of India had announced voluntary janta curfew on 22 March 2020. On 25 March 2020, it announced a nationwide lockdown, and all international flights were suspended. Consequently, several non-residents were stranded in India and required to prolong their stay in India. Concerns were raised that such non-residents may involuntarily end-up becoming Indian residents without any intention to do so. In order to avoid genuine hardship in such cases, the Central Board of Direct Taxes (CBDT) issued Circular No. 11 of 20201 dated 8 May 2020 providing for the exclusion of days that should not be considered for determining residential status of an individual in India. This Circular is applicable for FY 2019-20 only.
As there was no relaxation for FY 2020-21 and with the lockdown extending to FY 2020-21, a writ petition was filed before the Supreme Court2 seeking a direction to treat the taxpayer as non-resident. We, at BDO in India, have summarised the order passed by the Supreme Court and provided our comments on the impact of this decision hereunder:
Facts of the case
A taxpayer, an individual, had sought a writ of mandamus3 directing that he should be considered a non-resident Indian for FY 2020-21 (as done for FY 2019-20), regardless of the number of days of his stay in India, on account of the COVID-19 pandemic. The taxpayer relied on the CBDT Circular and submitted that the COVID-19 pandemic situation has continued beyond 31 March 2020 and even in the current FY, large number of persons have been stranded and could not leave India because of the lockdown.
Supreme Court Ruling
Considering the fact that for FY 2019-20, certain benefit was conferred by way of the CBDT Circular, the Supreme Court held that it would be appropriate for the taxpayer to approach the CBDT. Accordingly, the Supreme Court directed the taxpayer to make a representation before the CBDT. Further, the Court also directed CBDT to consider the representation within 3 weeks of the receiving such representation.
While the Supreme Court has not opined on the question raised before it, the timeline of 3 weeks is a welcome move as the taxpayer will have a clarity about the residency computation before the end of the current FY.
It is imperative to note that the Ministry of Finance in its Press Release dated 9 May 2020 stated that as the lockdown continues during the FY 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 FY 2020-21 shall be issued after the said normalisation.
Hence, it was expected that either some relaxation measures would be announced in the recent Union Budget 2021 or a circular would have been issued.
Apart from residency issue, the prolonged stay due to lockdown could have Permanent Establishment (PE) exposure of foreign company in India. Further, it is imperative to observe that some countries have doled out relaxation for determination of tax residential status in their countries. The Organisation for Economic Co-operation Development (OECD) also issued guidance on tax-treaties and the impact of the COVID-19 pandemic touching upon various measures that countries may implement. Considering this, it would be interesting to see the direction that CBDT comes out with.
2 Gaurav Baid vs. Union of India & ORS (WP No. 136/ 2021)- Supreme Court
3 A court order issued by a judge at a petitioner’s request compelling any government, corporation, or public authority to execute a duty that they are legally obliged to complete.