Instance of possible tax discrimination for PIO in Indian tax residency rules: Request feedback

Since a few days back, I was working on a case of a Person of Indian Origin (PIO) who had been staying in India for all these years to take care of ailing parents, and plans to move out of India since they’ve passed away, however would want to come to India for some days every year to settle the estate and other routine work. The query was: what is the maximum number of days he can stay in India to qualify as a non-resident.

There is a general belief that Indian tax residency laws, unlike the US law, does not depend on citizenship that’s the general sense that prevails in casual conversations and discussions. At the same time, people who have taken up foreign citizenship have been persuaded by successive Indian governments to opt for a PIO status (now its scrapped and merged with OCI). However, on a close reading of Section 6 of the Income Tax Act, the rules are different for an Indian citizen and a foreign citizen or a PIO.

Let’s see how.

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In this case, very clearly, as a combined reading of Section 6(1)(a) and 6(1)(c) will show, if the person is in India for less than 60 days, he will straightaway be qualified as a non-resident. However, in the instant case, the client will stay more than 60 days for this year. So, there are 2 sub-queries:

  1. For this year, can he take advantage of Explanation 1(a) of Section 6(1) and take benefit of 182 days minimum presence rule.
  2. For later years, can he take advantage of Explanation 1(b) of Section 6(1) and take benefit of 182 days minimum presence rule.

Before moving forward, let us discuss what how these explanations are exactly worded:

Explanation. 1]—In the case of an individual,—

 (a)  being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

 (b)  being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.

 

 Now, if we closely study these explanations, in explanation 1(a), the starking revelation is that it applies only to an Indian citizen and not to a foreign citizen. Now, if you wish to take an interpretation that it includes a PIO, in my view, that can be a very aggressive interpretation because if you see situation in explanation (b), it clearly mentions BOTH citizen as well as non-citizen. Had the intention of legislature been to given benefit mentioned in Explanation (1)(a) to both citizen as well as non-citizen, it would have expressly mentioned this point in wording of Explanation (1)(a) as well.

So, if we speak of my client, if he wishes to take a recourse to this provision (Explanation (1)(a)) by flying out of India and coming back after few months, still in my view, he CANNOT take this benefit as it is not available to PIOs. So, there we resolve query no. 1.

Before moving to query no. 2, I also wish to state that during my research, I came across two judgements which are not relevant to my client (because he is a PIO) but can be relevant to an Indian citizen who is travelling out of India.

In a 2010 AAR ruling for a non-resident Mr. Anurag Choudhary, the authority has observed that for an Indian national moving out India for purposes of employment, the sub condition in Section 6 (c) regarding 60 days in previous & 365 days in 4 years immediately preceding the previous year is NOT RELEVANT. That means effectively that if such person was in India in the year of moving out for less than 182 days, he qualifies as a non-resident irrespective of the fact that he was present more than 365 days in 4 years immediately preceding the previous year and is more than 60 days present in India in year of leaving. You can download the full judgement here

Now we come to query no. 2.

In this, the question, will that PIO when he comes to visit India can take benefit of simple and straightforward 182 days minimum presence rule or  he will still be weighed by the sub-clauses of Section 6(1)(c) regarding 60/365 rule. The essential problem here is that if you say that any presence more than 60 days will make a PIO qualify as a resident, in that case, a 60 day time period every year can prove too restrictive and as a result, instead of maintaining Indian assets and filing Indian tax returns, a PIO would feel it’s better to sell everything and relocate out of India. So, is there a way to take advantage of 182 days minimum presence rule so that the PIO who comes to India to settle estate etc. can atleast get a breathing time in India to find buyers, carry out paperwork and other formalities etc. without losing tax privileges available to a non-resident

In this case, if you see, Explanation (1)(b) specifically allows PIO to replace “60 days” in Section 6(1)(c) with 182 days. So, practically speaking, this makes Section 6(1)(c) totally irrelevant and makes it crystal clear: If you’re in India for less than 182 days, you are a “non-resident”. However, the practical challenge here is that the word “visit” is not defined. So, will a PIO visiting Indian for say 5 months will still be considered as on a “visit”? Considering that a PIO has a lifelong entry visa to India, we can also not rely on something like a “tourist visa” to PROVE that the person was on a visit. However, in such cases, the PIO must take care NOT to pick up employment or decide to stay back in India because in such a case, he will not be able to take benefit of this exemption.

The point I’m trying to make & humble feedback sought

The simple point I’ve tried to make here is that to a little extent, Indian tax residency rules also depend on a person’s citizenship status. So, PIOs who stay and work in India should note these small glitches if they’re planning to relocate out of India. At the end of the Government, it may well give a thought to clear off this glitch in the wording of the Act that can cause a tax discrimination between Indian citizens and PIO. Also, terms like “visit” should be expressly defined. I also wish to seek feedback from tax experts on these thoughts and will be grateful for the same.

Thanks!