Impact of War on the Tax World
Introduction: War Beyond Borders - A Tax Perspective
War is generally viewed through the prisms of geopolitics, diplomacy, and macroeconomics. However, its impact extends far beyond these traditional domains and penetrates deeply into the global tax ecosystem. In an interconnected world where individuals and businesses operate across jurisdictions, even regional conflicts can disrupt established tax norms and create complex compliance challenges.
Modern tax systems are largely built on principles such as physical presence, territorial nexus, and clearly identifiable economic activity. War disrupts each of these assumptions. It forces individuals to relocate unexpectedly, compels businesses to restructure operations, and interrupts cross-border mobility, all of which directly affect how tax laws apply.
Impact on Individuals: Residency, Income, and Unintended Consequences
Disrupted Tax Residency
One of the most immediate consequences of war is its impact on an individual’s tax residency. Under Indian tax law, residential status is governed by Section 6 of the Income Tax Act, 2025 (‘ITA’), which is primarily determined based on the number of days an individual spends in India.
An individual becomes a resident if they are present in India for 182 days or more in a financial year or satisfy the alternative 60/120-day conditions along with historical stay thresholds.
In conflict situations, individuals may find themselves stranded due to airspace closures, evacuation delays, or safety concerns. Such involuntary stays can push them beyond statutory thresholds (such as 182 days), triggering a change in residency status.
This shift is significant, as a person qualifying as a resident in India becomes liable to tax on their global income, which may result in unexpected and substantial tax liabilities for individuals who had no intention of becoming residents.
Taxability of employment income
Complications also arise in determining where employment income is taxed. Under Section 9(3) of the ITA, salary income is deemed to accrue in India if it is earned for services rendered in India. Judicial precedents have similarly affirmed that the country where employment is exercised holds the primary taxing rights.
In a situation where an employee, who ordinarily exercises employment in a foreign country, travels to India for personal or other reasons but is subsequently forced to remain in India due to airspace closures, and continues to work remotely from India, the salary attributable to services performed during such period of physical presence in India should be regarded as taxable in India. However, the applicability of short-stay exemptions or relevant tax treaty relief would need to be evaluated to determine the final tax exposure.
Increased Compliance burden
Beyond tax liability, individuals may face heightened compliance obligations, including:
- Filing returns in multiple jurisdictions
- Maintaining detailed travel and employment records
- Managing advance tax payments and disclosures
These obligations can be particularly burdensome during already stressful circumstances.
Impact on Business: Structural and Operational Risk
Permanent Establishment (PE) Exposure
For businesses, war-induced disruptions create a different set of challenges, particularly in cross-border taxation through the concept of Place of Effective Management (POEM). etc.
If employees relocate and work remotely from another country:
- Their presence may constitute a fixed place of business, or
- Their role in contract negotiation may trigger an Agency PE
Either scenario could expose the company to corporate taxation in that jurisdiction, along with compliance and reporting obligations.
In situations where senior management relocates due to war and begins making strategic decisions from another country, the company’s effective place of management may shift. This could result in the company being treated as a tax resident in that country, thereby exposing its global income to taxation there. Such a shift can have far-reaching implications for multinational enterprises and may require a reassessment of their overall tax structure.
Operational and Compliance Challenge
Operational disruptions caused by war also increase complexity. Businesses may face challenges in maintaining proper documentation, monitoring employee activities, and ensuring compliance with multiple tax jurisdictions. These practical difficulties can increase the risk of disputes with tax authorities and lead to additional scrutiny.
Judicial and Administrative Responses: Learning from the Past
Doctrine of Impossibility
An important legal angle in understanding the tax impact of war is the Doctrine of Impossibility, which holds that the law does not compel a person to do the impossible.
In war-like situations, individuals may be unable to travel due to airspace closures or security restrictions, leading to an involuntary stay in a particular country. Applying tax residency rules strictly based on the number of days, without considering such impossibility, can lead to unfair outcomes, as the extended presence is not by choice but by compulsion.
Indian courts have, in principle, recognized this aspect. In CIT v. Suresh Nanda1, the taxpayer’s passport was impounded, preventing him from leaving India. The court acknowledged that forced presence should not be held against the individual in determining residency, emphasizing the importance of intent (animus).
Administrative relief during COVID-19
The COVID-19 pandemic provides a useful precedent for how tax authorities may respond to extraordinary circumstances:
- CBDT Circular No. 11 of 2020 (8 May 2020) allowed exclusion of specified periods of forced stay in India for FY 2019–20.
- CBDT Circular No. 2 of 2021 (3 March 2021) addressed continued concerns for FY 2020–21 and clarified that cases of double taxation would be examined by the Board for possible relief, either broadly or on a case-by-case basis, upon submission of details in Form-NR.
These measures reflect a willingness to adopt a pragmatic approach in exceptional situations.
International Guidelines
The Organization for Economic Co-operation and Development (OECD) has issued guidance on the impact of exceptional circumstances on PE exposure, clarifying that the following situations would generally not result in a PE:
- The temporary presence of employees in a jurisdiction due to extraordinary circumstances does not create a PE, as it lacks the required degree of permanence.
- Short-term use of a home office would not constitute a fixed place PE, particularly where the premises are not at the enterprise’s; however, continued use beyond the exceptional period may trigger PE exposure.
- Temporary relocation of agents or conclusion of contracts from a different jurisdiction would not result in an Agency PE, unless such activities become habitual and continue beyond the temporary disruption.
The Need for Flexibility in Extraordinary Times
War fundamentally disrupts the assumptions on which tax systems are built. It creates unintended tax exposures, compliance burdens, and interpretational challenges for both individuals and businesses.
There is a growing expectation that tax authorities will adopt a flexible, pragmatic approach, similar to the relief measures introduced during the COVID-19 pandemic. This may include:
- Relaxation of residency rules in cases of forced stay
- Clarification on PE and POEM risks
- Greater reliance on treaty mechanisms to mitigate double taxation
Until such clarity emerges, proactive planning remains essential. Individuals must monitor their stay and carefully evaluate their tax positions, while businesses should implement robust tracking and governance mechanisms.
Ultimately, a balanced and purposive interpretation of tax laws will be critical to ensure that taxpayers are not unfairly burdened by circumstances beyond their control.
1. TS-202-ITAT-2014(DEL)