Tax residency is governed by the provisions of the Indian Income-tax Act, 1961 ('IT Act'). An individual is considered as tax resident in India for a given year, if either (a) he/she is in India for at least 182 days in that year, or (b) he/she is in India for at least 60 days in that year and at least 365 days in immediately previous four years. In a recent judgment1, the Tribunal held that aside from these conditions, even the purpose of visit outside India and the necessary visa requirements would be taken into account while determining residential status in India. In this article we shall seek to understand this position better and its implications qua taxation of individuals in India.
Tax residency test in India
An individual is considered as tax resident in India for a given year, if either he/she is in India for at least
- 182 days in that year (1st test), OR
- 60 days in that year and at least cumulative 365 days in immediately previous four years (2nd test)
1st test and 2nd test are two separate independent tests. Upon satisfaction of either 1st test or 2nd test, tax residency shall be deemed to have been satisfied for a given year, and the individual shall become tax resident in India under IT Act for that year. A resident individual would be taxable in India on his/her 'global income' and not just income accruing in/arising from India.
However, in the case of a citizen of India who leaves India during a year for the purposes of employment, business or profession outside India ('specified purpose'), in the 2nd test, '60 days' shall be read as '182 days'. This effectively means a relaxation of condition only for those citizens who may leave India for specified purpose i.e. such individuals are permitted to stay for more than 60 days in India during that year and still not be considered as tax resident in India provided they are in India for less than 182 days in relevant year ('beneficial relaxation under 2nd test').
Facts of the case
The individual, an Indian citizen and national, holding an Indian passport, has extensive business interests in UAE, USA, Singapore, France, Switzerland, Oman, Canada, Hong Kong, Australia, Myanmar and Malaysia in the form of shares in various companies in these jurisdictions. For the particular year in question, the individual visited Singapore and Malaysia under a multiple entry visa which can be used for business purposes as well as for social purposes. The passport entries reflect that such visits were taken for 'social purposes' or 'tourist purposes'. Further, the individual also possesses a tax residency certificate of UAE. During the relevant year he stayed in India for less than 182 days but was in India for more than 365 days during the immediately preceding previous four years.
Accordingly, it was the case of the individual that (a) since he was outside India during the relevant year for the purposes of 'business profession', (b) he would qualify for beneficial relaxation under 2nd test whereby he is required to stay in India for at least 182 days in that year (and not 60 days) and at least cumulative 365 days in India in previous four preceding years. That would mean that in the current case, since the individual stayed for less than 182 days (but may be more than 60 days) in India in the relevant year and stayed in India for at least 365 days during previous four years, he wouldn't qualify as a resident under Indian tax law for such year and accordingly he would be considered as a non-resident for the relevant year.
Question that arose
Would the individual who visited outside India for business purposes on a multi entry visa that also permits social/tourist purposes, be treated as an individual who left India for specified purposes, in order to avail beneficial relaxation under 2nd test?
The Judgment
It was held by the Tribunal that no country grants visas for employment or business purposes liberally. Merely having overseas business interest through shareholdings and traveling abroad would not ipso facto mean that these would qualify as exclusive business visits. Such overseas business interest does not presuppose that the purpose of travel of said individual to such jurisdictions would automatically be linked with the underlying business of such entities in which said individual may have shareholdings/investments.
Since the visa procured for purpose of travel was not a business visa or an employment visa but instead, effectively, a tourist visa, it may not be possible to claim that these were for business purposes. Accordingly, it would not qualify as specified purpose for beneficial relaxation under 2nd test.
This would mean that the said individual would need to test the 60 days test in India instead of 182 days. Since the period of stay in India (a) in relevant year exceeded 60 days, and (b) cumulatively in immediately previous four years exceeded 365 days, the said individual would qualify as tax resident in India under IT Act. Resultantly, he would be chargeable to tax in India on his global income and not only income accruing or arising in India.
Implication
One would need to factor purpose of visit outside India backed with appropriate expatriation documentation before testing for tax residency in India. Merely staying outside India may not be sufficient to ensure period of stay outside India for Indian tax residency purposes.
Footnote
1 DCIT v M. Mahadevan (Chennai ITAT)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
