Compiled by, Pranav Damania & Jigar Patel
20th January, 24
Globally the tax is levied based on the source from where the income arises and the residential status. India also follows the same whose tax regime defies the scope of total income which is subject to income tax. The scope differs as per the residential status of the person.
In this context the residential status of a person assumes a significant importance as whether all income becomes taxable or only income accrued in India becomes taxable in India leaving global income out of Indian tax jurisdiction depend on the residential status as determined as per The Income Tax Act and Rules thereon.
Under Income Tax, there are three categories:
i.Resident (R),
ii.Non-Resident (NR) and
iii.Resident but Not Ordinarily Resident.
i)Resident:
Residential status of a person is to be determined as “Resident” if any one of the condition get satisfied.
He resides in India for minimum 182 days in a year OR
He resided in India for at least 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.
Thus if a person satisfied any one of the conditions mentioned in “a” or b” then he becomes a resident person
ii) Non Resident:
A non-resident is a person who is not a resident which means he does not satisfy any of the conditions mentioned in “a” or “b” above.
For a Resident – His world income is taxable which means all income whether earned in India or outside India become taxable.
For Non-resident – Generally only income received in India become taxable.
It is important to note one exception to “b” mentioned above which is as under_
An Indian citizen or Person of Indian origin who being outside India comes on a visit to India during the previous year and
Whose total income other than income from foreign sources exceeds to 15 lakhs during the previous year then 60 days will be replaced by 120 days and in case the said income does not exceeds 15 lakhs then 60 days will be replaced by 182 days.
This is a big relief in order to provide relaxation to enable non-resident Indian who have made investment in India and who find it necessary to visit India frequently and stay here for the proper supervision and control over his investment and still retain status of non-resident.
We have discussed above how we determine “Resident” and “Non-Resident” under the law.
However, it is extremely important to know the third category which is “Resident but not Ordinarily Resident” called R&NOR.
iii) Resident but Non-Ordinarily Resident (R&NOR):
An individual will be R&NOR if he fulfils either of the two conditions mentioned as under.
a. He has been a non-resident in India in 9 out of 10 years or
b. During his seven previous years, he was present in India in 729 days or less.
For an Indian citizen or Person of Indian origin having total income other than income from foreign sources exceeds 15 lakhs during the previous year and who has been in India for more than 120 days but less than 182 days will be treated as R&NOR.
This category of resident which is R&NOR is extremely important for an individual as he is not liable to pay tax on income accruing or arising outside India unless it is derived from a business controlled in or profession set up in India.
Type of income and its taxability based on residential status:
By way of following tabular presentation, we hereby summarise the tax implication on residential status.
S. N. | Source of income | Resident (R) | Resident but Not ordinarily Resident (R&NOR) | Non-Resident |
1 | Income received or deemed to be received in India during the year | Yes | Yes | Yes |
2 | Income accruing or arising or deemed to be accrue or arise in India | Yes | Yes | Yes |
3 | Income accruing or arising outside India from a business controlled in or profession set up in India | Yes | Yes | Yes |
4 | Income accruing or arising outside India from a business controlled in or profession set up outside India | Yes | No, but if these income is attributable to operation in India then to that extent, it is taxed in India | No, but if these income is attributable to operation in India then to that extent, it is taxed in India |
Important Note: For any person who has any business connection in India or comes to India for any purpose need to keep a track of his total stay in India to remain non-resident. He must keep an evidence of his total stays in Indian for at least 10 years to show he is resident or non-resident. Any shift from the category from NR to R&NOR and from R&NOR to R will have a significant impact on tax in India.
While the above write up will give overall perspective of residential status for individual, the below write up will be helpful to determine residential status as a company which is the most popular form of business entity in India
India uses a distinct criterion called the Place of Effective Management (POEM) to determine a company’s residency. This criterion plays a pivotal role in ascertaining the company’s tax obligations. This is very important for multinational companies who will have potential exposure to Indian tax laws provided they arrange the affairs in an orderly manner.
Criteria for a Company’s Residency in India
A company would be a resident in India in any previous year if:
It is an Indian Co.,
Its Place of Effective Management (i.e. POEM) is outside of India.
A company shall be said to be engaged in active business outside India if:
Passive income is not more than 50% of its total income,
less than 50% of its total assets are situated in India,
less than 50% of total employees are situated in India or are residents of India, and
The payroll expenses incurred on such employees are less than 50% of its total payroll expenditure.
When it is established that the company is engaged in active business outside India, can we say that the POEM is outside India? The answer can still be “No”.
We must further check whether the majority of board meetings are held outside India. In other words, the POEM is presumed to be outside India if the company is engaged in active business outside India and the majority of board meetings are held outside India.
Example 1:
XYZ Ltd has its head office situated in the USA while it conducts its board of directors meeting in London. However, the senior management of the company is situated in India from where the major decisions for the conduct of the company are taken. In such a case where would be the company’s POEM?
In the given case, the company’s POEM would be in India as it is the place where the senior management of the company takes decisions which are important for the functioning of the entity.
Example 2:
ABC Ltd engaged in manufacturing of product X has 2 branches, one in India and other in China. It has a total of 10 assets out of which, 6 assets are located in China and 4 assets are located at the Indian branch. It has a total of 100 employees out of which 45 employees are Indian residents and other 55 employees are located in China. However, the company’s CEO & MD are Indian residents. The payroll expenditure incurred on these employees amounts to INR 5 crores out of which 3 crores belong to employees located in India and 2 crores to employees located in China. Can ABC Ltd be considered to be a resident of India?
In the given case, even though the company’s majority i.e. more than 50% of the assets and employees are located outside India, majority of its payroll expenditure i.e. more than 50% of the payroll expenditure pertain to employees located in India. Therefore, ABC Ltd does not have an active business outside India and its Place of effective management is in India. Hence, ABC Ltd is said to be a resident of India and its global income shall be taxable in India.
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