Double Taxation Due to Covid Overstay Sword Hangs over NRIs' Heads, SC Relief to be Sought Again

· NRIs who stay 182 or more days have to pay tax on global income

· NRIs stuck in India were hoping for a relief from govt

· CBDT simply assured there would be no “double taxation”

· This has no consequence for NRIs from Gulf where there is no income tax

So, most NRIs plan their visit and duration of stay in India to meet the residency condition and avoid paying tax in India on what they earn outside India.

Gaurav Baid, the 27-year old NRI chartered accountant, whose writ petition before the Supreme Court triggered a reaction from India’s direct tax authority, will once again knock at the court’s door. Baid, who works in Dubai, would either move a fresh petition or file an application challenging the recent communiqué from the Central Board of Direct Taxes (CBDT) which gave no relief to NRIs who, having overstayed in India due to the pandemic, now fear that their overseas earnings would be taxed by the Indian government.

“Mr. Baid intends to re-approach the Supreme Court for appropriate relief... the government has refused to grant general relaxation sought by us,” said Amish Tandon, partner, Innovatus Law Offices which is representing Baid.

Not only has CBDT refrained from giving a blanket relief, its circular this week may have worsened the situation for many NRIs like Baid. While the tax body has promised there would be no “double taxation” --- and, the determination of residence shall be done on the basis of relevant Double Tax Avoidance Agreement (DTAA) --- such an assurance is meaningless for NRIs working in UAE, Bahrain, Oman, Qatar, Kuwait, Bahamas, or in any other country where there is no direct tax on income.

Residency status, under Indian law, is determined by the duration of physical presence in the country: a person is considered resident if the period of stay in India is 182 days or more; or, if the person has more than Rs15 lakh domestic income and stays for 120 days or more. Unlike a resident whose global income is taxed, NRIs have to pay tax on income earned in India but not on income earned outside India. So, most NRIs plan their visit and duration of stay in India to meet the residency condition and avoid paying tax in India on what they earn outside India.

"The CBDT circular simply reiterates the existing regulations and provides no relief which most NRIs had hoped for. No exemption for forced stay in India due to COVID has been given as the sole purpose of the circular is to ensure that a person does not escape tax by being non-resident in both countries. But now NRIs have to apply for specific relief on a case to case basis and the matter is left to the discretion of the tax department," said Mitil Chokshi, partner, Chokshi & Chokshi.

The tax board has asked NRIs who may experience “double taxation” in the present financial year to file representation in a prescribed form by March 31. “But NRIs (like Baid) from the UAE, who had to involuntarily reside in India for a period of more than 182 days and whose grouse may not be related to 'double taxation' but to 'taxation of income in India' which otherwise would not have been taxed at all on account of the tax neutral nature of UAE may not have the option to make a representation to the government,” said Tandon.

Thanks to either suspension or disruption of flights, Baid, who works as an account manager with Kuber Trading FZE in UAE, could leave India only on October 5, 2020 --- by when the 182-day residency condition had been breached. Soon after the lockdown last year, the government issued a relaxation to exclude the number of days stay in India --- from 22nd March, 2020 to 31st March, 2020 --- for the financial year 2019-20. Baid’s prayer before the apex court was that a person who was assessed as NRI in FY 2019-20, should be considered as NRI in FY20-21 on account of the pandemic, regardless of the number of days spent in India.

According to senior chartered accountant Dilip Lakhani, "The tie breaker rule in DTAAs --- which comes into play when a person is considered resident of two countries --- will also not help NRIs stranded here. The conditions to be satisfied under this rule will in most cases lead to NRIs having residency in India --- thus exposing their global income to taxation here."

There are more than 13 million NRIs spread across 209 countries, and many of them seek employment and pursue business in tax neutral jurisdictions like UAE. Indeed, the circular could impact many NRIs who are based out of countries where the incidence of direct tax is lower than that of India.

According to corporate circles, more NRIs are exploring legal options. “To many NRIs, the recent CBDT circular comes across as a surprise. First, last May the finance ministry had said that the number of days in 2020-21 till normalisation of flights will be excluded in determining residency. Second, the court in Baid’s case took note of the benefit given for 2019-20. In the interest of fairness, CBDT should exclude, say, 90 days beginning April 1, 2021,” said Sanjay Sanghvi, Senior tax partner at the law firm Khaitan & Co.