Impact on Residential status of an Individual in Covid-19

Impact on Residential status of an Individual in Covid-19

Generally, number of days presence is considered as a threshold (the total number of days that an individual is present in a particular jurisdiction) for determining individual tax residency. An exception to this principle is where citizens are taxed irrespective of their presence. Due to the Covid-19 outbreak, travel is restricted, which gives rise to two main situations:

i)  A person is temporarily away from his home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country because of the Covid-19 crisis and attains domestic law residence there.

ii) A person is working in a country (the ‘current home country’) and has acquired residence status there, but they temporarily return to their  previous home country’ or are unable to return to their current home country because of the Covid-19 situation.

According to the OECD, in the first scenario it is unlikely that the person would acquire residence status in the country where he is temporarily staying because of extraordinary circumstances. There are, however, rules in domestic legislation considering a person to be a resident if he or she is present in the country for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty. Such a temporary dislocation should therefore have no tax implications. In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation.

With a view to remove genuine hardships to individuals, CBDT has issued a clarification through Circular No. 11 of 2020 dated 8th May, 2020 in respect of determination of residency u/s 6 due to Covid-19. The circular is applicable to individuals who came on visit to India on or before 22nd March, 2020 and have continued to be in India in different scenarios. This circular applies only for determination of residency for FY 2019-2020.

Accordingly, in case of individuals who have come on a visit to India on or before 22nd March, 2020 and are falling under the following categories, relaxation will be provided while determining their number of days' presence in India for the purpose of section 6 for FY 2019-20, as explained hereunder

Scenario 1: where an individual (who is on a visit to India) is unable to leave India before 31st March, 2020 – the period of stay between 22nd and 31st March, 2020(both inclusive) shall not be counted for determining presence in India.

Scenario 2: where an individual has been quarantined in India on account of Covid-19 on or after 1st March, 2020 and such individual has departed on an evacuation flight before 31st March, 2020 or is unable to depart – the period starting from the start of the quarantine period up to 31st March, 2020 or date of actual departure shall not be counted for determining presence in India.

Scenario 3: where an individual (who is on a visit to India) has departed on an evacuation flight before 31st March, 2020 – the period of stay between 22nd March, 2020 and date of his departure shall not be counted for determining presence in India.

It has also been stated that another circular will be issued in due course for determining residency for FY 2020-2021. These pro-active clarifications bring relief to many individuals facing difficulties in determining their residential status amidst the measures taken by various governments to contain the impact of Covid-19. It should be noted that this circular provides relief only from the residence test u/s 6 of the Act. The issue of an individual’s forced stay in India playing a role in constituting residence for a foreign company, HUF, etc.; or determination of a business connection or Permanent Establishment of a non-resident in India; and other such implications are not covered in the circular.