Posted by Prem on Saturday, June 11, 2011 | Tags : Tax Planning
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An individual under the Income Tax Act could either be Resident ordinary, Resident not ordinary or non resident. A company/firm/AOP could be resident or non-resident. The determination of exact status is important to know the tax incidence. We must remember that residential status under the income-tax act is different from residential status under Citizenship Act, FEMA or any other act. A person may be non-resident under any other act but he may be resident under the income tax act. Residential status also changes every year and the rules for determination of residential status need to be applied every year to ascertain the correct status for that year. A person may be resident in more than one country in the same year under the tax laws of these countries.
We need to correctly determine the residential status to understand scope of total income taxable in each case. Everyone, irrespective of residential status, is taxable for income accrued (or deemed to accrue) as well as income received (or deemed to be received) in India. However, if a person is resident in India, he is also taxable for income accrues or arises to him outside India. In the case of non-resident, the income is taxable only if it accrues/arises (or deemed to accrues/arises) in India or the income is received (or deemed to be received) in India. If income is accrued or arises outside India and is not received in India, it is not taxable in the case of non-resident. Income received outside and then remitted to India is considered as received outside India.
In the case of an Individual who is resident not ordinary, income accrue or arises outside India and not received in India, will get taxable in India only if it is derived from a business controlled in or a profession set up in India. For this reason it is important to understand the difference between resident ordinary and resident not ordinary.
Determination of Residential Status of an Individual
To determine the residential status of an individual in a particular year, we must understand what the basic conditions are and what the additional conditions are.
1. He is in India in the previous year for a period or periods amounting in all to 182 days or more.
2. He is in India for a period or periods amounting in all to 365 days or more during the four years immediately preceding the previous year and is in India for a period or periods amounting in all to 60 days or more in the previous year.
Note: In the case of Indian citizen who leaves India during the previous year for the purpose of employment or Indian citizen who leaves India as a member of the crew of an Indian ship or an Indian citizen or a person of Indian Origin who comes to India on a visit during the previous year, the basic condition no 2 is non-functional and their test of residency is restricted to first condition only. A person is said to be a person of Indian origin if either he or either of his parents or any of his grand parents was born in undivided India.
1. Resident in India in at least 2 out of 10 years preceding the previous year.
2. Presence in India for at least 730 days during 7 years immediately preceding the previous year.
Rule of Residency for Individuals:
1. Resident and ordinary resident: Must satisfy at least one of the basic conditions and both the additional conditions.
2. Resident but not ordinary resident: Must satisfy at least one of the basic conditions and one or none of the additional conditions.
Non Resident: Should not satisfy any of the basic conditions
To view it differently, if one of the two basic conditions are satisfied, the person is resident and if none of the basic conditions are satisfied, the person is non-resident. Additional conditions are only for the purpose of determining whether the person who is a resident, is an ordinary resident or not ordinary resident. If both the additional conditions are satisfied then he is an ordinary resident, otherwise he is not ordinary resident.
Determination of Residential Status for Firm/AOP/HUF
A firm or an AOP or an HUF is resident in India if control and management of affairs is situated wholly or partly in India. However, if control and management is situated wholly outside India it is non-resident.
Determination of Residential Status for Company
An Indian company is always resident in India. A foreign company is resident in India only if the control and management of its affairs are wholly in India. The term “Control and Management” refers to “Head and Brain”, which directs the affairs of policy, finance, disposal of profits and vital things concerning the management of a company. Control is not necessarily situated in a country in which the company is registered.
Under the tax laws a company can have more than one residency. The mere fact that a company is also resident in a foreign country would not necessarily displace its residence in India.Control and management means central control and not day to day business of the taxpayer. Where GBM is conducted and policy decisions are taken are vital indicators of where control and management are situated.
1. While leaving for employment abroad, while coming back on leave or coming back to India for good, one should be aware of the rules determining residency. A few days here and there can change the residential status from non-resident to resident. This will assume importance if the tax rate on overseas income is less than the tax rates in India.
2. The company should try to manage its affairs in such a way that it should not become resident in two countries. It will not matter if the two countries have double tax treaty between them. However, if there is no such treaty, the company might end up paying excess tax.