The Hindu Business Line : The residence factor and tax incidence

Employees sent abroad on deputation can take advantage of the liberal tax provisions concerning non-residents if they stay for more than 182 days in the accounting year outside India.

American citizens and Green Card holders are taxed on all incomes earned anywhere in the world. The Indian tax law is, however, different. Here, the accent is not exactly on citizenship but residence.

The ambit of taxation varies in relation to residence. Assessees are divided into three categories — resident and ordinarily resident, resident but not ordinarily resident, and non-resident.

Incidence of tax depends on whether the assessee is resident in India. If he is found to be a resident, the further question arises whether he is not ordinarily resident. Ordinary residence does not involve any additional chargeability, but being not ordinarily resident entitles a person to partial exemption from chargeability as a resident.

Generally, the incidence of tax is highest in the case of persons who are resident and ordinarily resident, lower for those who are resident but not ordinarily resident, and lowest for non-residents. The resident is determined with reference to a previous year and not the assessment year.

Section 2(30) of the Income-Tax Act, 1961 defines a "non-resident" to mean a person who is not a resident. Section 6 lays down technical tests of territorial connection for deciding the residential status of taxable entities.

Incidence of taxation varies with the factor of residence. Section 6(1)(c) provides alternative tests of residence.

If the person is continuously out of India during the whole year, he will be treated as non-resident in that year. Residence in India is calculated in terms of number of days. In the case of an Indian citizen who goes abroad for employment, he must have been in India for at least 182 days for being considered a resident.

Going abroad for employment can mean that the person concerned did not have employment in India. If a person who is already working in India goes abroad for more than 180 days, what will be his status? This issue was considered by the Authority for Advance Ruling (AAR) recently in the British Gas India P Ltd (ITR 218 AAR) case.

Period of stay

British Gas India (P) Ltd, part of the BG Group, is a leading international energy company with expertise across the natural gas spectrum. Manish Gupta began working with this company in February 2002. With effect from July 1, 2005, he was deputed to BG, UK, for two years. In the financial year 2005-06, he spent less than 182 days in India. The question was whether he should be considered a non-resident for tax deduction at source.

The Income-Tax Department thought that his stay of 88 days in India in 2005-06 made him a resident in India. The company argued that Manish Gupta was a citizen of India and left the country for employment; his stay in India was less than 182 days and therefore become a non-resident.

Section 6(1)(c) lays down that an individual will be considered a resident if he is in India for a period amounting in all to 60 days or more in that year.

The Explanation to Section 6(1) declares that in the case of a citizen of India who leaves the country in any previous year for employment, the stay in India should be taken as 182 days instead of 60 days or more. The I-T Department argued that since Manish Gupta was already in employment when he went on deputation, he cannot be said to have left India for employment.

Rejecting this submission, the AAR observed: "A careful reading of Explanation (a) would show that the requirement of the Explanation is not leaving India for employment but it is leaving India for the purposes of employment outside India.

"For the purpose of the Explanation an individual need not be an unemployed person who leaves India for employment outside India. Therefore, the fact that Gupta was already an employee at the time of leaving India is hardly material or relevant. For all these reasons, we hold that Manish Gupta is not a resident in India in the financial year 2005-06."

Companies operating in India have been sending their employees on deputation abroad. Such employees can take advantage of the liberal tax provisions concerning non-residents if they stay for more than 182 days in the accounting year outside India.

The AAR decision substantially clarifies the cumbersome definition of non-resident in the Indian tax law. It should be noted, however, that the test of 182 days is to be applied for the previous accounting year and not the calendar year.

In the present context, it can mean only a stay of more than 182 days abroad in the financial year for which the assessment is made in India.

(The author is a former Chief Commissioner of Income-Tax.)