India follows a residency-based taxation system. The Indian tax year starts from 1 April of a year and ends on 31 March of the subsequent year. The liability of income tax is governed by the residential status of an individual or company during the tax year.
 
A residency-based taxation system implements taxation on the local and worldwide income of its residents. Non-residents are only taxed for the income that they derive from the country.
 

1. Individual

The Income Tax rules in India contain provisions relating to the determination of the residency of an individual. The tax residential status of an individual, viz., ‘Ordinarily Resident’ or a ‘Resident but Not Ordinarily Resident’ or a ‘Non-Resident’ is dependent, inter-alia, on the period for which the person is in India during the tax year as below:
 

1.1 Ordinary Resident

Generally, an individual will be regarded as an Indian resident for FY 2020-21 only if he stays in India for 182 days or more unless he is covered by the following:
 

S. No.	Type of Individual	Total Income from Indian Sources	Period of Stay in India
1	India Citizen or a person of Indian origin	Less than INR 1.5 mn during the tax year	182 days or more during the tax year
2	India Citizen or a person of Indian origin	INR 1.5 mn or more during the tax year	182 days or more during the tax year; or 120 days or more during the tax year and 365 days or more in preceding 4 FYs
3	Individual who is not an Indian Citizen or person of Indian origin	Not applicable	182 days or more during the tax year; or 60 days or more during the tax year and 365 days or more in preceding 4 FYs

 
The Ordinary Resident is taxable in India for worldwide Income earned from all sources of income.
 

1.2 Not Ordinarily Resident

The individual would be treated as not ordinarily resident if the period of stay satisfies the conditions as below:
 

S.no	Particular	Not ordinarily resident(NOR)
1	Non-resident as per the basic conditions in at least 9 out of 10 immediately preceding tax years	Satisfy one or both the conditions
2	Less than 729 days in India in seven years immediately preceding both the tax years
3	A citizen of India or a person of Indian origin, having a total income, other than income from foreign sources, exceeding INR15 lakh during the tax year, who has been in India for a period or periods amounting in all to 120 days or more but less than 182 days	Not Ordinarily Resident
4	A citizen of India, having a total income, other than income from foreign sources, exceeding INR15 lakh during the tax year, who is not liable to tax in any other country or territory by reason of its domicile or residence or any other criteria of similar nature	Not Ordinarily Resident

 
The Non-Ordinarily Resident is taxable in India for an income received in India, income accruing or arising in India, income accruing or arising outside India, and from a business controlled from India.
 

1.3 Non-Resident

The individuals who do not satisfy the above-mentioned conditions fall under the category of non-resident. The non-resident is taxable in India for an income received in India or an income accruing or arising in India.
 
The rule that anyone staying in India longer than 182 days is deemed to be a resident, has posed problems for many people who are now therefore liable to pay taxes in multiple jurisdictions. The government has provided partial relaxation for individuals who arrived in India prior to 22 March 2020 for the period up to 31 March 2020, but their status in 2021 remains unclear. For 2020 the government has clarified that an individual’s short stay in India will not make them a resident for tax purposes. Furthermore, in the case of dual residency status, the tax treaty between the countries in which an individual has potential residency will determine their tax liability through the tie-breaker residency test.
 

2. Corporation

A corporation is deemed to be resident in India if it is incorporated in India or the control and management are wholly situated in India. The resident company, whether owned by Indian or foreign nationals, is taxed on their worldwide income arising from all sources. However, non-resident companies are taxed on the income earned from a business connection in India or from other Indian sources under the Income Tax rules in India or a permanent establishment as defined under the Income Tax treaty between India and foreign jurisdictions.
 
The term ‘business connection’ is considered wider in its scope than a permanent establishment as explained below:
 

2.1. Place of Effective Management (POEM)

The POEM is a place where the key management and commercial decisions are in substance made for the conduct of the business of an entity.  The company registered outside India, with the place of effective management in India, is considered as a company resident in India. POEM is an internationally recognized test to determine the residence of a company incorporated outside India.
 

2.2. Permanent Establishment

The foreign company would be considered as a permanent establishment in India if such a company would have a fixed place of business in India or is doing business in India through:
 

• Place of management, branch, office, factory, workshop, warehouse, etc.; or
• Building site or construction, installation or assembly project or supervisory activities in connection therewith where such site, project or activities continue for a period exceeding 180 days, or
• Furnish services for a period exceeding 180 days, or
• An agent (other than an independent agent) who habitually exercises an authority to conclude contracts or regularly deliver goods or merchandise or habitually secure orders on behalf of the foreign company.

 
In case the foreign company is considered to have a Permanent Establishment in India, the business income of such foreign company attributable to the business carried out in India are taxable in India.
 
The rules have some exceptions, such as home office and extended construction sites may lead to permanent establishment in India. We have summarized some of them as example for reference:
 
 

• Home Office Permanent Establishment: The employees working in a jurisdiction other than their ordinary place of business of enterprise could result in a permanent establishment. The common tests which are normally been used to determine the permanent establishment is a degree of permanency and is at the employer’s disposal. The OECD Guidance clarified that work from home under an extraordinary event or public health measures does not create permanent establishment due to lack of permanency and not at the business disposal. However, in case the dislocation of an employee continues after the cession of the restrictions, the home office can be considered as a permanent establishment subject to the permanency and disposal test.

 

• Agency Permanent Establishment: The agent working from home on the behalf of an enterprise could result in a permanent establishment in case such agent habitually exercises his authority to conclude the contract on the behalf of an enterprise. The OECD Guidance clarified that work from home during the public health measures imposed by the government would not be considered as being performed habitually. However, in case an agent continues to work from home and conclude contracts after the cessation of the public health measures on the behalf of an enterprise, such activities are more likely to be considered as habitual activities.

 

• Construction Permanent Establishment: The construction site could result in a permanent establishment where the site continues for more than twelve months. The construction site would not be regarded as ceasing to exist when the work is temporarily discontinued due to weather, and such period shall be included in the duration of a construction site. The certain period where construction and operation are prevented due to public health measures imposed by the government should be excluded from the threshold limit of a construction site to determine permanent establishment. Some geographies may include COVID 19 disruption in the threshold limit, while others may exclude it from the threshold limit of a construction site.

Conclusion 

Residence-based tax rules are easy to apply with a relatively higher degree of certainty in accordance with the trigger point of tax liability as it is simpler to determine the state of residence of an individual or corporation than to conclude on a source or situs of a specific income stream. In a resident-based taxation system, the country can tax people only if they are residents or domiciled in that country, irrespective of their source of income. For companies, their place of incorporation or registration or their place of effective management is regarded as their place of residence. In the case of income tax, individuals and companies have to pay taxes for their global income. The tax jurisdiction of an individual is determined not by their citizenship but by their residential status. In India, residence of an individual depends upon the number of days of their physical stay.