Last year, vide the Finance Act 2020, amendment under section 6 was carried out by inserting a new clause (1A) with an intention to tax citizens of India, having Indian-sourced income exceeding INR 15 lakhs during a financial year to be deemed to be a resident in India for that year, if he is not “liable to tax” in any other country or territory by reason of his domicile or residence.
The amendment was made with an intention to tax non-tax paying Indians staying in multiple countries and not paying tax on their world-wide income owing to failing the test of residency in India. However, the word, ‘Liable to tax’ created ambiguity in its interpretation. Also, there was no clarity as to which all taxes would be covered under its ambit.
One of the controversies revolved around India-UAE DTAA as in UAE, residents are not liable to tax at all. In the case of Cyril Eugene Pereira[1], the AAR held that if the law doesn’t impose tax on an individual, such individual cannot be said to be ‘liable to tax’ and therefore isn’t eligible to DTAA benefits.
Accordingly, speculations around whether an Indian who is resident in UAE in a particular year would get triggered by this amendment has caught lots of attention.
Another controversary revolved around scope of the term ‘liable to tax’. The Bombay High Court in the case of Chiron Bearing Gmbh & Co.[2] had held in the context of India-German DTAA that since Article 2 of that DTAA dealing with ‘Covered Taxes’ even included a Trade Tax within its scope, any person who is subjected to Trade Tax in Germany should be held as ‘liable to tax’ in Germany, and therefore, eligible to DTAA benefits. Thus, the question of whether tax includes taxes such as indirect taxes or custom taxes was also one of the concerns while interpreting the amendment.
In order to bring clarity, definition of ‘Liable to Tax’ is inserted as new clause (29A) to section 2 of the Income Tax Act, 1961, vide Finance Act 2021.
The insertion of definition of phrase ‘liable to tax’ clarifies the situation of tax imposition for such cases. The definition of the term ‘liable to tax’ in relation to a person provides as under:
‘Liable to tax means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country’.
The definition has retrospective applicability w.e.f. Assessment Year 2021-22 onwards.
The above amended definition under the income tax law is intended to provide much required clarity and thus, assists in determination of residential status of a person. However, its retrospective applicability could pose issues relating to already applied interpretation to it.
For detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
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[1] Cyril Eugene Pereira, In re [1999] 239 ITR 650 (AAR)
[2] DIT vs. Chiron Bearing Gmbh & Co. (TS-12-HC-2013(Bom))