By Jagdeep Sadhale
Many foreign workers who were in India for personal or business reasons in March 2020 were unable to return due to travel restrictions or only after a significant unwanted stay while continuing to provide services to their foreign employers from India.
Under the Income Tax Act, such stranded employees may qualify as “Non-Resident” or “Ordinarily Resident in India” for Fiscal Year 2020-21 based on the number of days of residence and other conditions and thus be taxed in India on India-related source income or income received in India. Some stranded individuals may be considered “Ordinarily Resident” and thus be subject to Indian tax on world income unless they break off their tax residence in their overseas country under the applicable Double Taxation Agreement (DTAA).
Exemption for short stays
According to the law, a tax exemption, ie “short stay exemption”, is only available to foreigners for a stay of up to 90 days per year, subject to the fulfillment of other conditions. For others, including Indian nationals, a DTAA short-stay exemption is available if the individual is considered a tax resident overseas and their stay in India does not exceed 183 days. For both exceptions, the foreign employer should not have a business presence in India.
Therefore, the stranded employees may be taxable in India in fiscal year 2020-21 in relation to services provided in India if they are not eligible for short stay exemption. If you are ordinarily resident by law and a tax resident in India under the DTAA, you may be taxable in India on your worldwide income and must declare your foreign assets on your Indian tax return.
In addition, due to these stranded workers, overseas employers must assess the impact on the “Place of Effective Management (POEM)” or “Business Relationship / Permanent Establishment (PE)” in India.
For fiscal year 2019-20, the Central Board of Direct Taxes (CBDT) issued a circular excluding unintentional stay in March 2020 due to quarantine / travel restrictions while determining the tax residence status of a stranded person. For the 2020-21 financial year, CBDT issued a circular in March 2021 stating that if a stranded person is liable to tax due to unintentional residence in India, such a person can apply for relief in their home country in accordance with the applicable DTAA in order to obtain double taxation to avoid. In addition, an extremely short time window, namely until March 31, 2021, has been provided in order to remedy the situation by contacting the CBDT in the event of double taxation.
Thus, the circular did not provide for a blanket exclusion of the forced length of stay or relief from follow-up taxes in India. There is also no discussion about POEM / PE. The circular has since been challenged by the Supreme Court (SC) by a person stranded in Dubai.
In view of the difficulties, will the CBDT make a revision and provide relief? If discharge is not received by September 30, 2021, which is the extended due date for filing the ITR for Fiscal Year 2020-21, the stranded individuals may have to pay tax and file their tax returns before the due date. A tax refund can then be claimed by revising the tax return if the relief takes place afterwards.
In summary, more clarity is needed and the stranded workers and their employers hope for appropriate tax breaks through the SC / CBDT.
The author is Tax Director, People Advisory Services, EY India. Views expressed are personal
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