Make it count: residential status key to taxation

An individual is taxed in India based on his tax residential status — which, in turn, depends on the number of days he is in India during a tax year (April 1 to March 31). Based on this calculation, an individual may be Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-resident (NR).

While an ROR is liable to tax in India on worldwide income, an RNOR or NR is taxed in India primarily on income sourced in India. It is vital to correctly determine an individual’s tax residential status for a particular tax year — if not, he/she could end up paying tax on their worldwide income in India; or, their foreign income, which is liable to tax in India, could escape the tax net.

One is, therefore, faced with the task of keeping track of the days a person is in India during a tax year. The challenge is: how do you count the number of days in India?

Does one consider calendar days, or is every 24 hours spent on Indian soil counted as one day? Is only a full day spent in India counted as a day, or is a fraction of the day also counted? If a fraction of the day is to be counted as a whole day, are the days of arrival and departure both counted as days in India? What happens if one spends less than 24 hours in India during a trip?

The Income Tax Act and Rules do not offer any answers. However, this issue has previously been a subject of litigation, and one can draw guidance from the judicial authorities’ interpretation of the term ‘days in India’.

In the case of Manoj Kumar Reddy, the Bangalore Tribunal noted that while computing the period for which an assessee is in India, the count should begin from the date of arrival of the assessee in India to the date he leaves the country. The Tribunal drew guidance from the provisions of the General Clauses, Act and concluded that in counting days in this manner, the first day should be excluded. Hence, when counting the ‘days’, the day of arrival should be ignored.

The Bangalore Tribunal’s view was followed by the Mumbai Tribunal in the case of Fausta C. Cordeiro, wherein it held that the arrival date is to be excluded from the count, particularly when the assessee arrived late in the day.

Based on the Tribunals’ views, one may consider counting on the basis of calendar days, excluding the day of arrival but including the day of departure, even if it is a fraction of a day. Thus, if an individual arrives in the evening and leaves the next morning, he would have been in India (for tax purposes) for one day.

A word of caution: tax officials tend to count both the day of arrival and day of departure as ‘days in India’, irrespective of whether it is a full day or a few hours. Hence, the ‘days in India’ in the example above would be two days, not one.

So, when you zoom in and out of India on business or for pleasure, don’t forget to keep a tab on your ‘days in India’, lest you are entangled in the tax net!

(Homi B. Mistry is Partner and Mousami Nagarsenkar is Manager, Deloitte Haskins & Sells.)

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