Key Takeaways: - Deemed Residency - Rationale - Decoding ‘liable to tax’ - Clarifications - Way forward

1. Liable to Tax: Implications and
Ramifications
CA Jugal Gala

2. Research Credits
Harsha D

3. Legends used
DTAA Double Taxation Avoidance Agreement
GST Goods and Services Tax
HNWIs High Net Worth Individuals
NR Non Resident
PPY Preceding Previous Year
PY Previous Year
RNOR Resident and Not Ordinarily Resident
ROR Resident and Ordinarily Resident
UAE United Arab Emirates
VAT Value Added Tax

4. Presentation Schema
Deemed Residency
Provisions
Rationale
Understanding ‘Liable to
Tax’
Relevant Considerations
Other Sections where
‘Liable to Tax’ may have
Implications for Non-
residents
Conclusion

5. DETERMINATION OF
RESIDENTIAL STATUS
AS PER
THE INCOME TAX ACT, 1961

6. RESIDENTIAL STATUS OF AN INDIVIDUAL
AS PER SEC 6(1)
Individual = Resident
of India, if:
Stays in India for
>= 182 days in PY
Stays in India for
>=60 days in PY
AND
Has stayed in India for
>=365 days in 4PPYs

7. • Clause(1A) was introduced by Finance Act, 2020 w.e.f. 01-04-2021 as an overriding provision to Sec 6(1)
Total income, other than income from foreign
sources*, > ₹15 lakhs
Not liable to tax in any other country or territory
by reason of
his domicile or residence or any other criteria of
similar nature.
Deemed to be
Resident but Not
Ordinarily
Resident in India
– Sec 6(6)(d)
Individual, being a citizen of India
DEEMED RESIDENT AS PER SEC 6(1A) and
6(6)(d)
*Income from foreign sources means income which accrues or arises outside India (except income derived from a
business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India.

8. PARTICULARS
ROR RNOR NR
Income received/deemed to be received in India
Taxable Taxable Taxable
Income which accrues/arises or is deemed to accrue/arise in India Taxable Taxable Taxable
Income accruing/arising outside India, from business which is
controlled from or profession set up in India Taxable Taxable Not taxable
Any other income accruing or arising outside India, which is not
deemed to accrue/arise in India (E.g.: Salary, Rent, Interest) Taxable
Not taxable Not taxable
SCOPE OF TOTAL INCOME
By classifying such individuals covered u/s 6(1A) as RNOR, it is sought to only tax such income, which is
controlled from India and not global income (as in the case of ROR)

9. RATIONALE FOR INTRODUCING SEC 6(1A)
The increasing mobility of individuals have resulted in situations where individuals could
arrange their physical presence in a way that they qualified as a non-resident in the home
country as well as overseas
Further, with technological advancements, it is now possible to manage one’s business or
professional affairs from any location remotely, without being physically present in a
particular jurisdiction

10. UNDERSTANDING ‘LIABLE TO TAX’
• Let us now try to understand the meaning of ‘liable to tax’
• Although FA 2020 did not define the meaning of ‘liable to tax’, Finance Bill 2021 defined it as follows:
“Liable to tax”, in relation to a person, means:
• There is a liability of tax on such person under any law for the time being in force in any
country, and
• Shall include a case where subsequent to imposition of tax liability, an exemption has been
provided
A plain reading of the above text would mean that even if a person is taxable under any law, not only being
the Income Tax law (e.g. VAT, GST, Excise) of any other country, such person would fall within the ambit of Sec
6(1A).
The scope of acts such as GST or VAT is wide and exclusion from Sec 6(1A) based on tax liability on sales/
consumption is inconsistent with the intention to tax the business income of persons.

11. AMENDMENT TO DEFINITION OF ‘LIABLE
TO TAX’
• However, Lok Sabha, while passing the Finance Act, 2021, amended the definition vide Finance Act, 2021
as follows:
“Liable to tax”, in relation to a person and in reference to a country, means:
• There is a liability of tax an income-tax liability on such person under any the law of that
country
• Shall include a person who has subsequently been exempted from such liability under the law
of that country.
This rightly reflects the intention of the lawmakers to specifically bring into the ambit of law, persons whose
income is not taxable in any other country.
Further, the courts have held in the past that so long as a country has a right to tax a person on account of
their domicile, residence, or similar criteria such a person should be considered as being ‘liable to tax’,
irrespective of whether such a country exercises its right to tax that person or not.

12. REASON FOR DOMICILE OR RESIDENCE
OR SIMILAR NATURE
• One of the conditions for the concept of deemed residency to apply is:
Indian citizen, is not liable to tax in any other country or territory
by reason of
his domicile or residence or any other criteria of similar nature.
The section shall apply only where a person is not liable to tax in any other country because of his
domicile/residence, i.e because he is a non-resident of a country or being a resident, enjoys exemptions.
In interpreting “other criteria of similar nature”, the rule of ejusdem generis shall apply, wherein the term will
take colour from the words preceding it and shall not, in any way, include a government policy of nil taxation
or say, age or nature of income (capital gains are not taxable in some countries, agricultural income)
A crucial question arises as to whether the provisions of Sec 6(1A) would apply in case of countries like UAE,
etc. where income tax is not levied on account of prevailing tax laws and not by reason of domicile or
residence or other criteria of similar nature

13. Thus, one should not conclude the taxability based on the deeming provisions of Sec 6(1A) but resort to the
applicable DTAA
Applying the principles of the tie-breaker rules envisaged in Article 4 i.e. Permanent Home, Habitual Abode,
Nationality, economic interests, etc., the residential status shall be determined
However, once he is regarded as resident of both the countries, Article 4 of relevant DTAA shall be analysed to
confirm the residential status by applying the tie-breaker rules
In case a person, being a resident of any country, is not liable to tax in such country by reason of domicile or
residence and fulfils the conditions of Sec 6(1A), he shall be deemed to be RNOR in India
PRECEDENCE OF DTAA OVER DOMESTIC
LAWS

14. OTHER SECTIONS WHERE ‘LIABLE TO TAX’
MAY HAVE IMPLICATIONS FOR NON-
RESIDENTS
Where the income liable to tax cannot be definitely ascertained or can be ascertained only with an amount of
trouble or expenses which CBDT feels unreasonable, in the following cases:-
(i) …
(ii) persons residing outside India;
(iia) operations carried out in India by a non-resident;
(iib) transactions or activities of a non-resident;
(iii) …
then CBDT may frame rules for prescribing methods of estimating such income
Sec
295(3)

15. CONTD
Sec 10(23FE) exempts dividend, interest or long term capital gains of a specified person, from an investment
made by in India, whether in the form of debt or share capital or unit, subject to specified conditions
“Specified person” shall, interalia, include a pension fund, which-
(i) is created or established under the law of a foreign country including the laws made by any of its political
constituents being a province, State or local body, by whatever name called;
(ii) is not liable to tax in such foreign country or if liable to tax, exemption from taxation for all its income
has been provided by such foreign country
(iii) satisfies other conditions as may be prescribed
(iv) does not participate in day to day operations of investee
(v) specified by Central Government in the official gazette
Sec
10(23FE)

16. CONCLUSION
More clarity is
required on “any
other criteria of
similar nature” as
cases of exemption
and deduction
provided without the
reason of residence or
domicile may not get
covered under the
deeming provision
Tie breaker rules
envisaged in DTAA
may come to the
rescue of the person,
deemed to be
resident as per Sec
6(1A), and he /she
may not be regarded
as RNOR as discussed
before
The insertion of the
definition of “liable to
tax” created an
atmosphere of chaos
amongst non-
residents - they would
deem to be RNOR in
India without even
staying for a day in
India
However, the said
insertion may not
have serious
ramifications as far as
residency provisions
are considered on
account of beneficial
provisions under
DTAA and more
clarity on wordings of
Sec 6(1A)

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