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No Residential Status relief for NRIs

Last year, we wrote about relief given to NRIs for calculation of Residential Status for FY 2019-20 here.


Here's a short summary of what CBDT said last year:


  • Stay in India from 22 March 2020 to 31 March 2020 will not be counted for NRIs/ Foreign Nationals if they are stuck in India due to the Covid-19 lockdown.

  • CBDT also clarified that Circular for determining the residential status in such cases for Financial Year 2020-21 would be issued in due course, depending upon normalization of/ resumption of international flights.


Problem now is, looks like the CBDT isn't giving any new relief to NRIs stuck in India for FY 2020-21.


CBDT has issued a new circular clarifying their position on the issue. Linked here.


TLDR?


CBDT has essentially said that it's unlikely that you will have to pay double tax in India as well as your country of residence if you are stuck in India because of Covid. They mentioned 3 reasons why:

  1. Short stay would not constitute residence in India - This is as per the traditional manner of Determination of Residential status.

  2. Tie breaker rule under the DTAA. This rule essentially looks at which country you have a closer nexus to.

  3. Dependent personal services clause of the DTAA. This clause applies for employment income/ salary. Basically, this clause says that salary is taxed in the country of residence, unless employment is exercised in India.

There's also a bit in the circular about how OECD has also said double taxation will not be caused due to the covid situation - let's avoid this mumbo jumbo for now.


CBDT has also stated that if inspite of these provisions, you are facing double taxation, you can submit Form NR electronically. The CBDT would then consider if any general or specific relaxation is required to be provided in cases like this.


Practical Issues


There are a few problems with this approach taken by the CBDT:

  1. This clarification has been provided way too late. A lot of NRIs were residing in India since CBDT said they would issue a circular for FY 2020-21 in due course.

  2. What happens if the NRI is from Dubai or any other jurisdiction where there is no personal income tax? The NRI would be forced to pay tax in India because he stayed in India for more than 183 days. While there would be no double tax - Originally, the NRI had no tax anyway - this is an unnecessary burden on the NRI.

  3. In certain cases, the tax rates in the country of residence is much lower than India's tax rate. While the NRI won't face double taxation, they may face excess tax because of being stuck in India because of the covid situation.


Overall, a lot of NRIs were waiting for this circular. Looks like they are all slated for disappointment.


If you're stuck in India and not sure how to plan ahead, feel free to contact us. Our team of experts will help you structure and minimize your taxes.

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