In an order that would provide great relief to corporate executives going abroad for 182 days or more, the Authority for Advance Ruling (AAR) has decided that tax is not leviable on the salary they receive in India since they will be considered as non-residents during the year.
AAR, a quasi judicial body on tax matters, gave this verdict on a petition filed by British Gas. AAR was clarifying the doubts over the issue whether a person can be considered non-resident Indian if he travels outside India for more than 182 days in a year even as his travel is linked to his employment in India.
A person who travels outside India to take up a job is a non-resident and hence not taxable in India. However, the issue before AAR was whether a person travelling overseas for more than 182 days in connection with his employment in India was entitled to pay tax or not. The I-T department sought to levy tax on the income of such executives who travelled abroad for more than 182 days by denying them the status of a non-resident. The department sought to deny the non-resident status on the ground of having been employed in India.
In the case of British Gas employee Manish Gupta who was deputed to the UK for two years from May 25, 05, the I-T took a stand that tax was leviable in India because he stayed in India for 88 days. The department was relying on a provision in the I-T Act by which one can be considered a resident of India even if he stays in the relevant year only for 60 days but has been in India all the days in the four previous years.
The ruling is likely to have a significant impact on the growing number of executives being sent on assignments overseas by both multinationals as well as Indian companies. Major companies like Asian Paints, HLL, Citibank and TCS have been posting employees abroad either for projects or on short-term assignments at their own offices.
TP Ostwal, senior chartered accountant said, It is unfortunate that the I-T department tries to litigate where there is no litigation required and interpret the law the way it wanted. This is only because there is no accountability.
AAR said there are two requirements in Section 6 (1) which defines residence of an individual in India. (1) If the individual is in India in the relevant year for 182 days or more. Second, he can be construed a resident even if he stays only for 60 days but has been in India all days for the previous four years.
Now in a new explanation in the Income-tax Act, the provision of 60 days has been replaced by 182 days. This change implies that if a person is not in India for more than 182 days in a given year, he could not be construed as resident in India and hence the income generated outside India during this period would not attract tax in India. According to the explanation, this is the case even if the persons employment is in India.
The AAR gave effect to this explanation in deciding the case of the British Gas employee Manish Gupta. According to the AAR, a careful reading of the explanation (a) to section 6 (I) of the I-T Act would show that the requirement of the explanation is not leaving India for employment outside India.
For the purpose of the explanation an individual need not be an unemployed person who leaves India for employment. Therefore, the fact that Mr Gupta was already an employee at the time of leaving India is hardly material or relevant. For all these reasons, Mr Gupta was not a resident in India in FY06.