NRI Status for Taxation under IT Act, 1961

Key takeaways

• Introduction including the definition of NRI and who is considered to be resident if India.
• Background of the case including the circumstances which has led NRI to approach the SC of maintaining their NRI status for the purpose of taxation
• Agreements presented by the said NRI and CBDT and the stand of Supreme Court on the same
• Conclusion- the case is still pending in the Supreme Court and will be discussed again latest on 16th of April, 2021.

Introduction

The present case i.e. Gaurav Baid V. Central Board of Direct Taxes & Ors., deals with the status of Non Resident Indians (NRI’s) in India for the purpose of taxation under, Income Tax Act, 1961. A Non Resident Indian is a person who is of Indian origin but does not reside in India due to work purposes etc. Though the act doesn’t define who all will be considered as NRI but it does define who is said to be the resident of India in relation to taxation law. The section 6 of the act talks about who is considered as the resident of India- an individual is said to be a resident of India in any previous year if(a) he is in India in that year for a period or periods amounting in all to one hundred and eighty two day or more ; or (b) having within the four years preceding that year in India for a period or periods amounting in all to three hundred and sixty-five or more, is in India or period or periods amounting in all to sixty days or more in that year. People who aren’t covered under this criterion are not considered as residents of India. Therefore, the same implies that the person who has been India for less than 182 days in one year and 365 days in four years in a Non Resident Indian.

Background of the case

Several NRI’s, stuck in the country due to COVID-19 travel restrictions, have been seeking relief from paying income tax under the residency criteria. In this case an UAE based NRI; Gaurav Baid filed an appeal in Supreme Court in Feb., 2021 asking the Supreme Court to give direction to the Indian Government to maintain his status of NRI for the purpose of taxation under IT Act, 1961. The petitioner had to extent his stay in India which crossed the period of 182 days because of the COVID 19 pandemic and the resulted lockdown. The petitioner has become liable for paying taxes as the resident of India because of his stay and hence, he had approached the honorable court to continue maintaining his status of Non Resident Indian for taxation keeping in mind the exceptional circumstances because of which the stay had been extended. The residents of India have to pay taxes for their income earned both globally as well as in India however the NRI’s do not have to pay taxes for the income earned globally, they are only eligible to pay taxes for the income earned in India. The Central board of Direct Taxation though providing relaxation to the NRI’s in the last FY of 2019-20 is not providing any relaxation to them in the present FY OF 2020-21 and they have been made eligible to pay taxes as the resident of India. The case is still pending in the honorable Supreme Court.

Arguments presented and the court’s direction

The petitioner in the case has approached the Honorable Supreme Court in the month of February, 2021 to maintain his NRI status for the purpose of taxation under residency criteria given in IT Act on the ground that the extent of the stay was not because of their own free will but because of the lockdown for curbing the global pandemic and the resulted travel restrictions. He appealed that he should get immunity from the liability of paying tax in India on his global income for the current financial year of 2020-21. The honorable Supreme Court observed that since in the previous fiscal year(2019-20), benefits were granted by the Central Board of Direct Taxes via its circulars to the NRI’s, it would be appropriate for the petitioner to approach it and make a representation to the CBDT in three days on relief to be given to non-resident Indians in terms of the payment of tax under the Income Tax Act for FY21 amid COVID-19, following which the authority will have to take final decision.

However, the CBDT in its Circular no.2 of 2021 issued in light of the SC order dated ferbruary 10, 2021, whereby CBDT was tasked to decide on relief to be granted to the individuals. IN the context of this circular, the CBDT has provided that if any individual is facing double taxation even after taking into the account Double Taxation Avoidable Agreement (DTAA) made between the countries to avoid the possibility double taxation in the FY 2020-21. The Tie-breaker rules are also included in the DTAA’s to help determine which country has the right to tax an individual. However, if any such case arises he/she may furnish the specified information by 31st march, 2021 and the relief will be provided. The circular provided a partial relief but did not clearly exempted the people from paying taxes as done in the relaxation provided in the FY OF 2019-20. It is considered that if the relaxation is provided this year as well the individuals will not have to pay taxes to any of the countries and they will be free and exempted from paying their taxes.

In reply to the circular dated 03 march, 2021 the petitioner has filed a petition challenging the given circular of CBDT. The plea has stated that the petitioner’s situation is quite different and should be considered differently as he is been employed in a zero tax country from those who are resident in tax levying countries and says that this circular amounts to thinly veiled attempt by Indian Government to tax individuals who otherwise would not have fallen within the tax net.

The three-judge bench consisting of Justice UU Lalit, Justice Indira Banerjee and Justice KM Joseph after hearing the plea has issued a notice in all connected matters, returnable on 16th of April, 2021.

Conclusion

The present scenario has come into existence because of the pandemic that has disturbed the whole world. Measured steps have been taken by every country so that no single individual suffers the wrath and a proper system can still be channelized. The situation with such people like NRI’s has been dealt worldwide by entering into agreements like DTAA, through, this there will be no problem of double taxation and individuals could be considered as a tax resident under the domestic income tax laws of multiple countries, especially in the year they immigrated. The same has been accepted by India. The circular no.2 of 2021 of CBDT also concluded that the possibility of any individual being subject to double taxation on his income for FY 2020-21 is remote. The conclusion was based on the guidance provided by the Organization for Economic Cooperation and Development ( OECD). However, the situation as of the petitioner where he is employed in a country which is tax neutral, his circumstances should also be taken into consideration by SC while providing any decision. Hence, it can be said or agreed upon that any decision that will be taken by honorable Supreme Court in the present case will be in favor of all the included parties and provide justice to everyone.