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Taxing non-residents on citizenship criteria

Feb 05, 2020

Finance BILL, 2020 proposes to amend the tax residency of non-residents by inserting sub-section (1A) to Section 6 to deem an Indian Citizen to be resident in India, if such an individual is not liable to tax in any other country or territory by reason of his residence or domicile or any other criteria of similar nature.   Author CA Shyam Nori discusses the proposed anti-abuse measure by looking at: What the expression ‘Liable to tax’ means, stateless person, conflict between Finance Bill and memorandum, and in the context of treaty.  The author elucidates that “Liable to tax doesn’t necessarily mean subject to tax”. In this context a reference is made to SC decision in Azadi Bachao Andolan which clarified that 'liable to tax' connotes that a person is subject to one of the taxes mentioned in Article 2 in a Contracting State and it is immaterial whether the person actually pays the tax or not”. The author further highlights that the amended section does not meet the intention of the amendment as stated in the memorandum i.e., anti-abuse measure to address statelessness as a person cannot be said to be not liable to tax, if the person were to be resident of a country and the income earned may not be subject to tax, but the person is liable to tax. Speaking of the CBDT clarification on the amendment stating that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India, shall not be taxed in India unless it is derived from an Indian business or profession, the author opines that “This would put to rest any concerns the Indian citizens, who are tax residents elsewhere but not liable to tax, may have about getting taxed in India. This would equally be the case with non-treaty countries.”

Taxing non-residents on citizenship criteria

Finance BILL, 2020 (“Finance Bill”) proposes to amend the tax residency of non-residents by inserting sub-section (1A) to Section 6 to deem an Indian Citizen to be resident in India, if such an individual is not liable to tax in any other country or territory by reason of his residence or domicile or any other criteria of similar nature.   

The memorandum to the Finance Bill, explains the rationale for such amendment: “The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywhere in the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed. In the light of the above it is proposed that:

  • an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.”

The author discusses the proposed anti-abuse measure by looking at: what the expression ‘Liable to tax’ means, stateless person, conflict between Finance Bill and memorandum, and in the context of treaty.

Liable to tax :

A person on account of residence or domicile will be subject to laws of that country; and if by law of the country is liable to tax then the person on account of residence is said to be liable to tax.  Liable to tax doesn’t necessarily mean subject to tax. A person is liable to tax even if actual tax is not imposed. This would include a situation where the income is counted as income of the State without imposing any tax on it. It would also include a case where income is specifically exempt from tax under the tax laws of the country.

The principles governing the interpretation of the treaty, are different from those of the interpretation of a statute; the phrase ‘liable to tax’ one is quite familiar with in the context of residence article in a tax treaty finds its place in the statute as a deeming provision of residence intending to avoid abuse and double non-taxation.

The expression 'liable to tax in a State' simply means that the net of the law of taxation of that State covers that person and not that he must pay the tax in that State. The following observation of the Hon'ble Supreme Court of India in UOI and Anr. v. Azadi Bachao Andolan and Anr., [TS-5-SC-2003-O]; elucidates the point:

"It seems clear that a person does not have to be actually paying tax to be 'liable to tax'--otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the Convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is nevertheless liable to. tax, if the exemption were repealed, or the person no longer qualified for the exemption, the person would be liable to comprehensive taxation." (emphasis, italicized in print, supplied) It is thus clear that 'liable to tax' connotes that a person is subject to one of the taxes mentioned in Article 2 in a Contracting State and it is immaterial whether the person actually pays the tax or not.”

Stateless person:

A person can arrange his stay in such a manner that he is not resident of any country and thereby is stateless to be subjected to any laws of a State.  As the person is not subjected to State laws is also not liable to tax. In arranging so the person is avoiding taxes and achieves non-taxation. This is precisely what the Finance Bill tries to stop. An Indian Citizen who arranges his affairs (and stay) in such a manner to avoid residence in any country and is thereby not subjected to tax, will be deemed to be resident of India.

A person cannot be said to be stateless merely because the person is not subject to tax in any state. For Example, a person earning salary income from UAE is liable to tax, but such income is not subject to tax, and this doesn’t mean the individual not subject to tax on such salary income in any other country is stateless. Similarly, a person resident of Mauritius not subject to tax on capital gains (grand fathered investment) cannot be said to be stateless.

Conflict between the Finance Bill and Memorandum:

The Finance Bill intends to deem an Indian citizen who is not resident of India, and not liable to tax anywhere by reason of residence in any country, as Resident of India. A person resident in any country may not be liable to tax , but nevertheless is a resident and cannot be said to be stateless. The intention behind introducing the anti-abuse measure is to address statelessness. The actual text of amendment of Sec 6 doesn’t bring out the same effect. If a person is resident of any country, he is not stateless. A person cannot be said to be not liable to tax, if the person were to be resident of a country. The income earned may not be subject to tax, but the person is liable to tax. The subject matter of the phrase “liable to tax” is the person not the income.

Treaty Situation :

This is better understood by an example :‘A’ is an Indian citizen working in Dubai for the last 15 years and is a Resident of UAE. ‘A’ earns salary income and as there are no personal income taxes in UAE, ‘A’ though liable to tax is not subject to tax in UAE. The Amendment proposed by Finance Bill doesn’t impact ‘A’ as ‘A’ is liable to tax in UAE. Even otherwise if ‘A’ were to be said to be not liable to tax in UAE and is deemed to be resident of India, as intended by the proposed amendment, ‘A’ is also a resident of UAE as his stay exceeds 183 days in a given year. Would a tie-break rule need to applied in such a case? and most likely given the economic and social interests would be said to be resident of UAE ? In short, the proposed amendment doesn’t impact those working in UAE where their stay exceeds 183 days in UAE. Similarly, wouldn’t impact Indian citizens who are not subject to tax in any country and are liable to tax by reason of domicile or residence or any other criterion of a similar nature.

CBDT issued a clarification on the new provision pertaining to residence in India saying this is an anti-abuse provision and it is noticed that some Indian citizens shift their stay to low or no tax jurisdiction countries to avoid payment of tax in India.  Further clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India, shall not be taxed in India unless it is derived from an Indian business or profession. This would put to rest any concerns the Indian citizens, who are tax residents elsewhere but not liable to tax, may have about getting taxed in India. This would equally be the case with non-treaty countries.

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