Is the residential status of a person relevant for determining the taxability of the income in his hands?
Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.
Taxability of any income in the hands of a person depends on the following two things :
(1) Residential status of the person as per the Income-tax Law; and
(2) Nature of income earned by him.
Hence, residential status plays a vital role in determining the taxability of the income.
What are the different classes of residential status prescribed under the Income-tax Law for an individual?
For the purpose of Income-tax Law, an individual can have any one of the following residential status:
(1) Resident and ordinarily resident in India (also known as resident)
(2) Resident but not ordinarily resident in India
(3) Non-resident
Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.
Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging Income-tax?
The Income-tax Law has its own set of provisions for determining the residential status of a person. Thus, while determining the residential status of a person under the Income-tax Law, the facts like Indian citizenship, Indian passport, etc., have no relevance. From the point of view of Income-tax Law, a person will be treated as a resident in India if he satisfies the criteria specified in this regard under the Income-tax Act.
What are the different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)?
For the purpose of Income-tax Law, a HUF can have any one of the following residential status:
(1) Resident and ordinarily resident in India
(2) Resident but not ordinarily resident in India
(3) Non-resident
Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the HUF would be a resident and ordinarily resident and in the next year it may become non-resident or resident but not ordinarily resident and again in the next year its status may change or may remain same.
What are the different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF?
For the purpose of Income-tax Law, a person other than an individual or a HUF, i.e., company, partnership firm, etc., can have any one of the following residential status:
(1) Resident
(2) Non-resident
Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the taxpayer would be a resident and in the next year may become non-resident and again in the next year the status may change or may remain same.
How to determine the residential status of an Individual?
To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.
Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.
Step 1: Determining whether resident or non-resident
Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):
(1) He is in India for a period of 182 days or more in that year; or
(2) He is in India for a period of 60 days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year.
If an individual does not satisfy any of the above conditions he will be treated as non-resident in India.
Note : Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grand-parents (maternal or paternal) were born in undivided India.
Note: With effect from Assessment Year 2015-16, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or peri ods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
In short, following test will determine the residential status of an individual:
• If the individual satisfy any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.
• If the individual satisfy any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.
• If the individual satisfy no conditions satisfied at step one, then he will become non-resident.
How to determine the residential status of a HUF for the purpose of the Income-tax Law?
To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident.
Step 1 given below will ascertain whether the HUF is resident or non-resident and step 2 will ascertain whether the HUF is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the HUF turns to be a resident.
Step 1: Determining whether resident or non-resident
For the purpose of Income-tax Law, a HUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions :
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
In short, following test will determine the residential status of a HUF :
• If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.
• If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.
• If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.
How to determine the residential status of a company?
With effect from Assessment Year 2017-18, a company is said to be resident in India in any previous year, if:
(i) it is an Indian company; or
(ii) its place of effective management, at any time in that year, is in India.
For this purpose, the “place of effective management” means 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.
The concept of POEM is effective from Assessment Year 2017-18. The CBDT has issued the final guidelines for determination of POEM of a foreign company.
The final guidelines on POEM contain some unique features. One of the unique features is test of Active Business Outside India (ABOI). The guidelines prescribe that a company shall be said to engaged in ‘active business outside India’ if passive income is not more than 50% of its total income. Further, there are certain additional cumulative conditions to be satisfied regarding location of total assets, employees and payroll expenses.
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two stage process, namely:—
1 First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
2 Second stage would be determination of place where these decisions are in fact being made.
However, it has been provided that the POEM guidelines shall not apply to a company having turnover or gross receipts of INR 50 crores or less in a financial year vide CIRCULAR NO.8, DATED 23-2-2017.
(To know more about POEM guidelines, read CIRCULAR NO.6, DATED 24-1-2017.)