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05 March 2021
CBDT issues clarification on tax residency provisions – Tax relief on applications only

The rapid outbreak of the novel coronavirus led to global lockdowns and caused massive interruptions of international flights, stranding the citizens in different countries, including several foreign nationals in India. This unprecedented, extended stay has resulted in unintended tax issues as many countries treat individuals as tax residents basis the duration of their stay in the country. 
In India, too, the tax residency is determined basis the number of days stayed in India. Accordingly, in order to provide clarity, the Central Board of Direct Taxes (CBDT) had issued Circular No 11, dated 8 May 2020, providing relief to individuals who came to India on a visit before 22 March 2020 and could not leave or depart on or before 31 March 2020, due to the COVID-19 pandemic and related travel restrictions. This Circular clearly defined the residency status of NRIs, expatriates and other foreign nationals for Financial Year (FY) 2019-20 who arrived in India but could not return to their countries.
The CBDT had also specified that certain clarifications would be issued for the FY 2020-21 once the lockdown is lifted by the government and international flights resume. However, there no such clarification was issued till date.
Recently, the Supreme Court, in the case of Gaurav Baid1, directed the individual assessee to make a representation before the CBDT regarding relief to be granted to Non-Resident Indians in terms of payment of taxes under the Income Tax Act for FY 2020-21 in the wake of the pandemic. The Supreme Court stated that the CBDT should respond to such individuals within three weeks of the receipt of representation. 
After receiving several representations from affected taxpayers, the OECD’s policy responses to the pandemic and developments across the globe - including in the United States, the United Kingdom, Germany and Australia, the CBDT has finally addressed this concern by issuing a fresh Circular No 2, on 3 March 2021. The key points of the said Circular are provided below:
  • The CBDT has clarified that in this unprecedented situation, there may not be any situation wherein the individual taxpayers would bear the hardship of double taxation due to the presence of domestic tax law provisions and relevant Double Tax Avoidance Agreement (DTAA).  A similar approach is adopted by the OECD as well as most nations while providing relief for tax residency determination on account of unintended stay because of COVID-19.
  • Further, the CBDT has stressed that providing any kind of general relief for stranded individuals on account of tax residency determination may eventually lead to a double non-taxation, and such individuals may end up not paying any taxes in any country. 
  • Hence, in essence, no specific relief is being provided to the residential status of individuals who are stuck in India due to the pandemic.
  • However, in order to provide relief to an individual who would suffer double taxation due to any exceptional situation, the CBDT has provided a mechanism under which an individual may apply to CBDT online in a prescribed form attached with the Circular. After examining the facts of the case, the CBDT may provide general or specific relief to the individual case. The application has to be made by individuals, and the form is required to be filed by 31 March 2021. This form shall be submitted electronically to the Principal Chief Commissioner of Income-tax (International Taxation) and is available here 
Our Comments
It was widely expected that the Indian Government would issue some relief for the FY 2020-21 regarding the determination of residency. While this Circular does not provide a general relief, it has issued a mechanism to address issues faced in genuine cases.
In our view, it becomes imperative for individuals stuck in India to review their tax position, and in case of unintended double taxation, they should make an application to the CBDT for specific relief. Given the short timeline, this should be a high-priority item for NRIs/PIOs and foreign citizens stuck in India due to COVID-19 travel restrictions.
It is also important to note that no specific relief or mechanism has been provided for MNCs who may have Permanent Establishment (PE) exposure in India as their employees are stuck in India. In our view, reliance would have to be placed on the OECD’s guidance in this regard and appropriate tax positions would have to be adopted.
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