The global movement of Indians from India to other countries has finally caught the eye of the Indian administration. India seems to be following the footsteps to introduce citizenship-based taxation akin to the manner in which United States (U.S.) did in the 1890s, which is still part of its present tax system.

The memorandum to the India’s Union Budget 2020-21 (Budget 2020) highlights that Indian citizens, including high net worth individuals (HNIs), may have been taking advantage of the current tax residency rules and avoid paying taxes in any jurisdiction during a tax year. On this basis, the Budget proposes to introduce citizenship-based taxation for Indian citizens who are not taxed in any jurisdiction.

This blog discusses a brief history on the U.S. citizenship-based taxation followed by the present and proposed Indian tax residency rules.

Brief history on the U.S. citizenship-based taxation

The U.S. enacted income tax in 1890s post the Civil War and adopted citizenship-based taxation. The lawmakers added it as part of the tax code with a reasoning that the U.S. citizens cannot escape the U.S. tax system and avoid paying taxes when they go abroad. This tax treatment was focused to bring equity i.e. all the U.S. citizens are not taxed distinctively. The current tax system continues to include citizenship based taxation.

Indian tax residency rules – as it stands today

Indian tax residency rules are based on the number of days an individual stays in India. In principal the fundamental residence rules are:

1. An individual is an Indian tax resident if he resides in India:

– for 182 days or more during the current tax year; or
– for 60 days or more in India during the current tax year and for 365 days or more during 4 tax years preceding
the current tax year. The period of 60 days is replaced by 182 days where an Indian citizen or a person of Indian origin (i.e., a person who’s either parents or grand-parents were born in undivided India) comes on a visit to India, but not for a permanent stay.

2. An individual is a ‘not ordinarily resident’ in India if he:

– has been a nonresident in India for 9 out of 10 tax years preceding the current tax year; or
– has been in India for 729 days or less during 7 years preceding the current tax year.

3. An individual is a non-resident Indian if he does not satisfy any of the above requirements during the tax year.

Modification of the residency rules

The Budget proposes below provisions for determining Indian tax residency with effect from tax year beginning April 1, 2021:

1. An Indian citizen who is not tax resident of any other country or territory would be deemed to be an Indian tax resident for the relevant tax year;

2. An Indian citizen or a person of Indian origin who is visiting India would be an Indian tax resident if he stays in India for 120 days or more during the relevant tax year.

3. An individual shall be a “not ordinarily resident” in India for a relevant tax year, if he has been a non-resident in India in 7 out of 10 previous years preceding the relevant tax year. This new condition would replace the existing conditions.

The Budget is targeting to include non-resident Indians if they have avoided being part of Indian tax system. The citizenship-based taxation is in alignment with the U.S. tax law but more clarification with respect to its application would be helpful. Albeit the lower number of days threshold makes it easier for nonresidents to determine their residency on each tax year basis unlike earlier where added conditions would have preempted their tax status. A change in the tax residency rules may directly impact a jurisdiction’s right to tax an income or list the reporting obligations for tax residents. But it should be equally supported by strong administrative procedures and support by the tax authorities.

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