Residence Concept under
Income-tax Act, 1961
Sandeep Bagmar R
Advocate
Introduction
•
•
•
Tax is an important source of revenue for
governments in all countires. Income tax refers to
the annual tax on income levied by the
government subject to the provisions of the
Income Tax Act,1961.
Tax is a price paid to live in a civilized society.
The Income Tax Law compromises study of the
Income Tax Act 1961, the Income Tax
Rules,1962,
Circulars,
Notifications
or
Classfications issued from time to time by the
Central Board of Direct Taxes and judicial
decisions and precedents
2
History
•
•
Income Tax was first introduced in 1860 in India
by Sir James Willsons in order to meet financial
difficulties due to mutiny of 1857 and lasted for 5
years.
The history of Income tax can be dievided into 3
broad categories
i)1860-1885
ii)1886-1914
iii)1914-till date
3
Constitution of India
•
•
•
•
•
•
Constitution : Grundnorm – Supreme law of the
land: Underlying basis for a legal system
Power to tax is an incident of sovereignty – a
sovereign function
Power to levy tax – Legislative competence
Taxes mentioned in list 1 – only Centre has the
power
Taxes mentioned in list 2 – only State has the
power
Taxes mentioned in list 3 – both Centre and State
has the power
4
Constitution and Tax
•
•
Entry 82
–
Entry 82 of List I of the Seventh Scedule of the
Constitution of India ‘
–
Taxes on income other than agricultural income’
Article 265 – Very important for any taxing statute
–
–
‘No tax shall be levied or collected except by authority of
law.’
Therefore not only levy but also the collection of tax must
be under the authority of law.
Thus the authority to tax is derived by the
government from the Constitution of India.
5
Basis Of Charge
•
•
Section 4 of the Act gives the authority to the
government to levy or charge income-tax – as
contemplated under A. 265
Four Principles for charge of income-tax under
section 4
(i) Income-tax is to be charged at the rate or rates
fixed for the year by the annual Finance Act
(ii) the charge is on every person, including the
assessable entities enumerated in S.2(31)
[defines “person”]
(iii) the income taxed is that of the previous year
and not of the year of assessment; and
(iv) the levy is to be on the total income of the
assessable entity computed in accordance with
and subject to the provisions of the Act.
6
Ingredients of Section-4
-
- Person – 2(31)
Assessee – 2(7)
Previous year – 2(34)
Assessment year – 2(9)
Total income – 2(24)/5
Residential status – 6
Rates of taxes – Finance Act
Maximum amount not chargeable to tax
7
Scope of Total Income
•
•
•
•
•
Section 5 defines total income.
The importance of Section 5 is that it attracts the
chargeability of income to tax depending upon
the location of accural or receipt.
Section 5 – ‘subject to provisions of this Act’…
The ambit of taxation varies with factors such as
residence of assessee and source of income.
Residence and Source Rule – Important for
purpose of taxation
8
Section 5 - Factors of Residence
Residents who are ordinarily resident
Such persons are charged to tax on:
i) income received or deemed to be received in India
in the previous year, the date or place of its accural
being immaterial
ii) income which accrues or arises or is deemed to
accrue or arise in India during the previous year, the
date or place of its receipt being immaterial
iii) income which accrues or arises outside India
during the previous year, even if it is not recevied in
or brought into India
9
Section 5 - Factors of Residence
•
Residents who are not ordinarily resident
Residents who are not ordinarily resident are
chargeable in respect of the first two items
enumerated in the previous slide.
–
They are exempt from tax in respect of income accruing
or arising outside India unless it is derived from a
business controlled in or a profession or vocation set up
in India.
10
Section 5 - Factors of Residence
•
i)
ii)
Non-Residents
Such persons are charged on:
Income received or deemed to be received in
India in the previous year, the date or place of its
accrual being immaterial
Income which accrues or arises or is deemed to
accrue or arise in India during the previous year,
the date or place of its receipt being immaterial
11
Section 6 - Residential Status
•
•
•
Source Rule & Resident Rule
Resident Rule
- Country has right to tax ALL income of its
residents
Source Rule
- Country has right to tax ONLY such income of
Non Residents which in some way are connected
to that country and NOT ALL income
12
Importance of Residential status
•
•
•
For instance, whether an income accrued to an
individual outside India, is taxable in India
depends upon the residential status of the
individual in India
Similarly, whether an income earned by a foreign
national in India is taxable in India, depends on
the residential status of the individual, rather than
his citizenship.
Therefore, the determination of the residential
status of a person is very significant in order to
find out his tax liability.
13
Importance of Residential Status for Tax
•
ü
ü
ü
ü
ü
Only after determining the residential status of a
person one can decide what income is taxable in
that country:
Step1: Determine whether Income or not
Step2: Determine whether person resident or not
Step3: What income (in terms of earned in which
country) is liable for tax in that country
Step4: Apply the computation rules on such
income and determine the taxable amount
Step5: Apply the appropriate tax rates and
determine the tax liability
14
Criteria to Determine Residential Status
•
•
Different countires use different criteria to
determine residential status.
Some of them are:
Ø Citizenship
Ø Having home in that country
Ø Registered/Incorporated in that country
Ø Having Place of management in that country
15
Criteria used in India
In India, the following criteria is used for
determining residential status:
Ø
No. Of days stay
Ø
Place of Incorporation
Ø
Place of management
•
Different criteria's are used for different categories of
persons – Persons defined u/s 2(31)
16
Criteria Vs. Category of Person
•
•
For Individuals = Number of days stay in
India
Others = Place of Incorporation (in case of
companies)
Place of Management (other than
companies)
17
Categories of Residential status
•
•
For tax purpose, all tax payers are classified into
the following two broad categories based on
residential status:
i) Residents
ii) Non-residents
Residents are in few cases sub classified into
following categories:
i) Resident and ordinarily resident
ii) Resident but not ordinarily resident
18
Residential Status for Individuals
•
ü
ü
Relevant Provisions: Section 6(1) and 6(6) of
Income Tax Act,1961
Step1: Determine whether a person is a resident
or non resident as per section 6(1)
Step2: If he is resident then determine if he is
resident ordinary or resident but not ordinarily
resident – section 6(6)
19
Residential Status for Individuals
Under S.6(1), an individual is said to be resident
in India in any previous year, if he satisfies any
one of the following conditions
A. He has been in India during the previous year
of total period of 182 days or more – S. 6(1)(a)
B. He has been in India during the 4 years
immediately preceding the previous year for a total
period of 365 days or more and has been in india for
at least 60 days in the previous year – S. 6(1)(c)
Thumb rule: if either satisfied = Resident. If none =
Non-resident
•
20
Residential Status for Individuals
Remember: Basic Condition A
i)
He is in India in the previous year for a period of
182 days or more
ii)
If more than 182 days no need to look at
Condition B
Eg. For PY 12-13, one has to examine if the
individual was in India for more than 182 days
during 1st April 12 to March 31st 13
21
Residential Status for Individuals
Remember: Basic Conditon B
i)
He is in India for a period of 60 days or more
during the previous year and 365 days or more
during 4 years immediately preceding the
previous year
ii)
If in a previous year stay is more than 60 days
and less than 182 days, basic condition B needs
to be examined
Eg. For PY12-13, one has to examine if the no.
of days stay during 1st April 12 to 31st March is
60 days or more and during the period 1st April
08 to 31st March 12 the stay is 365 days or more
22
Residential status for Individuals
Key points for interpretation
•
“Stay in India” need not be continuous period of
stay, aggregate period of stay, even in breaks has
to be considered
•
The stay need not be an active one or it need not
be at any one place of residence, business or
employment
•
For the purpose of counting the no. of days stay,
both the date of arrival and date of departure
needs to be counted and not the no. of hours
stayed on the date of arrival or departure
23
Residential Status for Individuals
Key points for interpretation
•
Stay includes stay in the territorial waters of India
(i.e.12 Nautical miles (22KM) into the sea from the
Indian)
•
Even the stay in Ship or boat or barge or any
other type of vessel or equipment marooned in the
Indian territorial waters will be considered for
calculating the period of stay
24
Exceptions to Basic Condition B
•
•
•
An Indian citizen who leaves India during the
previous year for the purpose of employment
outside India or who leaves India during the
previous year as a memberof the crew of an
Indian shp
Indian citizen or a person of Indian origin who
comes on a visit to India during the previous year
Period of 60 days in PY = 182 days
25
Rules for Determining Resident but Not
Ordinarily Resident
Applicable only to Individuals and HUF
•
A Not Ordinarily Resident (Resident but Not
Oridinarily) person is one who satisfies ANY ONE
of the conditions specified under S.6(6) which is:
i) If such Individual has been non resident in India
in any 9 out of the 10 previous years preceding
the relevant previous year, or
ii) If such individual has during the 7 previous
years preceding the relevant previous year been in
India for a period of 729 days or less
•
26
Residential Status - S.6(2)
•
•
•
Section 6(2) applies to HUF, Firm, LLP, AOP
A HUF would be resident in India if the control and
mangement of its affairs is situated wholly or
partly in India
If the control and management of the affairs is
situated wholly outside India it would become a
non resident
27
HUF - NOT Ordinarily Resident Status
•
•
•
This applies only to HUF
If the HUF is resident, then the residential status
of the Karta determines whether it is Resident and
ordinarily Resident or Resident but not ordinarily
resident
If the Karta is ROR, then the HUF is ROR and if
the Karta is RNOR, then HUF is RNOR
28
Place of Control and Mangement
•
•
The criteria for determining the residential status
of persons other than individual is based on the
place where Control & Mangaement of the entity
is located at
The expression “control and mangement” referred
to under section 6 refers to the central control and
management and not to the carrying on of day-today business by servants, employees or agents.
The business may be done from outside India
29
Place of Control and Management
•
•
•
•
Control and Management of a business is said to
be situated at a place where the head and brain of
adventure is situated
The Place of control may be different from the
usual place of running the busines and sometimes
even the registered office of the assessee
Control and mangement of a business need not
necessarily be done from the place of business or
from the registered office of the assessee
Control and management do imply the functioning
of the controlling and directing power at a
particular place with some degree of performance
30
Residential Status of Companies(old)
•
A company is said to be Resident in India if:
i)
ii)
•
•
It is an Indian company as defined under S.2(26)
Its control and management is situated wholly in India
during the accounting year
Indian company means company incorporated
under the Indian Laws – Companies Act, 1956/
Companies Act, 2013
Thus, every Indian company is Resident in India
irrespective of the fact whether the control and
mangement of its affairs is exercised from India or
outside
31
Residence Of Company (new)
•
•
•
•
Section 6(3)(i) remains the same – Indian
company
S.6(3)(ii) – substituted, by FA, 2016, w.e.f 1.4.16,
i.e. to be applicable for PY 2016-17/AY 2017-18
Company is said to be a resident in India in any
previous year if, its place of effective
management, in that year, is in India
Place of Effective management” is defined in the
Act to mean a place where key management and
commercial decisions that are necessary for the
conduct of the business of an entity as a whole
are, in substance, made.
32
POEM in India: Determination?
•
•
•
•
Board Circular dated 24/1/17 - No.6/2017
10 page circular for guiding a four word
expression
Objective test to be subject (subjective)
Test/Guideline: The POEM in case of a company
engaped in active business outside India shall be
presumed to be outside India if the majority
meetings of the BoD of the company are held
outside India
33
POEM in India: Determination
Twin test
(i)
Establish there is active business outside India
and
(ii) majority meetings of the BoD are held outside
India
34
POEM in India: Determination
•
i)
ii)
iii)
iv)
Active Business outside India
Passive Income not more than 50% of Total
Income
Less than 50% of total assets in India
Less than 50% of employees are in India/RoI
Expenses of employees in India is less than 50%
of its total pay roll expenses
35
POEM in India: Determination?
•
Passive Income - Defined
Aggregate of:
(i)
(ii)
•
•
Income from transaction with ACs
Income from Royalty, dividend, Capital gains, nterest,
or rental
Exception Interest income – Banking / financial
institutions
Head Office: Where Senior Mangement and
direct support staff located
Senior Management: Persons responsible for
developing and formulating key strategies and
policies
36
POEM in India: Determination?
•
•
•
•
i)
ii)
Based on whether or not company is engaged in active
business outside India
Para 7 – Presumption
Exception: If powers of management exercised by
holding company or persons in India- POEM is in India
(Para 7.1)
Para 8: If test for Companies other than those that are
engaged in active business outside India
Identify persons making key management and
commercial decisions
Determine where these decisions are being made
37
POEM in India: Determination?
•
•
•
POEM as a concept similar to one used in Treaties
A. 4(3) OECD Model Treaty POEM is – Tie breaker
rule
Under OECD - It is emphasized that there can be
only one “place of effective management”
38
Scope of Total Income and Residential
Status
•
•
•
Section 5 - Lays the foundation for what income is
liable to tax in India
Section 5 - Provides the scope of total income in
terms of the Residential Status of the person
Incidence of tax on any person depends upon his
Residential Status
39
Criteria for Income to be Part of Scope of
total Income
•
Ø
Ø
Ø
Following criteria needs to be considered for any
income to be included in the scope of total income
liable for tax in India:
Residential Status of the assessee
Place of accural or receipt of Income
Point of time of accrual or receipt of income
40
Indian Income & Foreign Income
Whether Income is
received(or deemed
to be received) in
India during the
relevant year
Whether Income
accrues(or arises or is
deemed to accrue or
arise)in India during
the relevant year
Status of Income
Yes
Yes
Indian Income
Yes
No
Indian Income
No
Yes
Indian Income
No
No
Foreign Income
41
Non Resident- Scope of total Income –
S.5(2)
•
Ø
Ø
•
Ø
For a Non Resident the scope of total Income
Includes only:
Income received or deemed to be received in
India in the previous year
Income to accrue or arise in India during the
previous year
For a Non resident
Income accruing or arising outside India is not
liable for tax in India
42
Case Study
•
•
•
Individual – Resident
Individual – Non Resident
Company
43
Thank You
Kaar Vidhi Tax Lawye rs and Cons ultants
P.A.Towers, B-1, Ground Floor,
869, Poonamallee High Road, Chennai – 600 010
+91 44 26451573 | +91 99529 63306
[email protected]
44