TAXATION & LAWS

CIA 1A

TOPIC – Analysis of the residential status and the Incidence of Tax

under all three cases by a case law and comparison of Indian Tax
system with that of UAE.
Submitted by: -

Soumya Kumari – 2221226

Submitted to: -

Name – Prof. Divya Shree V

Department – School of Business and Management

Deadline – July 19th 2024

Christ (deemed-to-be) University

Yeshwanthpur Campus
 CONTENTS

S.NO TITLE Pg. no

1. Introduction

2. Case Law

3. Determination of Residential Status

4. Identification of different types of

income and incidence of tax under all
three cases.
5. Comparison between Indian and UAE
Tax System
6. Assumptions made

7. Findings and Suggestions

8. Conclusion
INTRODUCTION

Taxation plays a pivotal role in any country's economic framework, shaping the financial
responsibilities of individuals and entities within its jurisdiction. This assignment delves into
the intricacies of determining the residential status and the consequent incidence of tax on
individuals, with a specific focus on India and a comparative analysis with the United Arab
Emirates (UAE) tax system. The objective is to construct a case scenario that thoroughly
examines the residential status for tax purposes, identifies various categories of income, and
computes the incidence of tax based on these classifications.

To begin with, the assignment will illustrate the residential status of an individual under the
three distinct categories recognized by the Indian tax system: Resident and Ordinarily
Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR).
Through detailed calculations and assumptions, we will analyze how an individual’s
movements and duration of stay influence their residential status. This analysis is crucial as it
determines the scope of income liable to tax in India, affecting income sourced both
domestically and internationally.

Subsequently, we will identify and categorize around 20-25 different types of incomes,
ranging from salaries and business profits to capital gains and foreign income. For each
income category, we will compute the incidence of tax based on the individual’s residential
status, providing a comprehensive understanding of how tax liabilities vary across different
scenarios. This detailed breakdown will offer insights into the complexities of the Indian tax
system and highlight the importance of accurate residential status determination.

In the final part of the assignment, we will compare the Indian system with the tax framework
of the UAE, a country known for its tax-friendly environment. By contrasting the two
systems, we aim to shed light on the differences in determining residential status and the
subsequent tax implications. The comparison will include an analysis of the absence of
personal income tax in the UAE and how it impacts individuals compared to the more
complex tax structure in India.

The findings from this comparative study will be discussed in detail, providing structured
suggestions on reducing the tax burden for individuals while ensuring compliance with the
legal framework. This assignment aims to offer a nuanced understanding of residential status
and tax incidence, equipping students with the knowledge to navigate and optimize tax
obligations in different jurisdictions.

CASE LAW

Case Scenario: Assessment of Residential Status for Tax Purposes in India

Mr. Rajesh Kumar, born on January 1, 1980, is an Indian national employed as a Software
Engineer with a multinational company. His family resides in India. To determine his
residential status for tax purposes for the financial year (FY) 2020-21, we assess his presence
in India over the past few years.

 In FY 2020-21, Mr. Rajesh stayed in India from April 1, 2020, to October 15, 2020,
totaling 198 days.

 In FY 2019-20, he was in India from April 1, 2019, to November 30, 2019, amounting
to 244 days.

 In FY 2018-19, he spent time in India in two segments: from January 1, 2019, to

March 31, 2019 (90 days), and from October 1, 2018, to December 31, 2018 (92
days), making a total of 182 days.

 In FY 2017-18, he was in India from April 1, 2017, to June 30, 2017 (91 days), and
from January 1, 2018, to March 31, 2018 (90 days), summing up to 181 days.

 In FY 2016-17, he stayed in India for 120 days.

DETERMINATION OF RESIDENTIAL STATUS

1. Determining Resident or Non-Resident for FY 2020-21: An individual is considered a

resident in India if:

 They are in India for 182 days or more during the financial year, or

 They are in India for 60 days or more during the financial year and 365 days or more
during the preceding four years.

Calculation:

 FY 2020-21: 198 days (More than 182 days, so resident)

2. Determining Ordinarily Resident or Not Ordinarily Resident: A resident individual is

considered an ordinarily resident if:

 They have been a resident in India in at least 2 out of the 10 previous years preceding
the relevant year, and

 They have been in India for 730 days or more during the 7 years preceding the relevant
year.

Check for the past 10 years:

 FY 2019-20: Resident (244 days)

 FY 2018-19: Resident (182 days)

 FY 2017-18: Non-Resident (181 days, not meeting 182 days)

 FY 2016-17: Non-Resident (120 days)

 FY 2015-16 to FY 2010-11: Data not provided, assumed non-resident status.

Check for 730 days:

 FY 2019-20: 244 days

 FY 2018-19: 182 days

 FY 2017-18: 181 days

 FY 2016-17: 120 days

 FY 2015-16: Assumed 120 days

  FY 2014-15: Assumed 120 days

 FY 2013-14: Assumed 120 days

Total days = 244 + 182 + 181 + 120 + 120 + 120 + 120 = 1087 days (More than 730 days)

Since Mr. Rajesh Kumar has been a resident in at least 2 out of the 10 previous years and has
been in India for more than 730 days during the 7 years preceding the relevant year, he is an
ordinary resident.

3. If the criteria were not met: If the criteria for an ordinarily resident were not met, Mr.
Rajesh Kumar would be classified as a Not Ordinarily Resident.

4. If the individual did not meet the resident criteria: If Mr. Rajesh Kumar did not stay in
India for 182 days or more in the relevant financial year and did not meet the 60 days + 365
days criteria, he would be classified as a Non-Resident.

Summary of Residential Status for Mr. Rajesh Kumar:

 FY 2020-21: Resident (198 days in India)

 Ordinarily Resident: Met the criteria (Resident for 2 out of 10 years and 730+ days
in 7 years preceding the relevant year)

Conclusion:

Mr. Rajesh Kumar is an ordinary resident in India for the financial year 2020-21 based on
his days of stay in India and his residential status in the preceding years.
CALCULATION OF INCIDENCE OF TAX
Tax Incidence on Different Types of Income

Ordinarily Not Ordinarily Non-

Type of Income
Resident Resident Resident

1. Salary from Indian company Taxable Taxable Taxable

2. Salary from foreign company (work

Taxable Taxable Taxable
in India)

3. Salary from foreign company (work

Taxable Not Taxable Not Taxable
outside India)

4. House property income in India Taxable Taxable Taxable

5. House property income outside India Taxable Not Taxable Not Taxable

6. Business income from business

Taxable Taxable Taxable
controlled in India

7. Business income from business

Taxable Not Taxable Not Taxable
controlled outside India

8. Capital gains from sale of shares of

Taxable Taxable Taxable
Indian company

9. Capital gains from sale of shares of

Taxable Not Taxable Not Taxable
foreign company

10. Capital gains from sale of property

Taxable Taxable Taxable
in India

11. Capital gains from sale of property

Taxable Not Taxable Not Taxable
outside India

12. Interest from Indian bank accounts Taxable Taxable Taxable

13. Interest from foreign bank accounts Taxable Not Taxable Not Taxable

14. Dividend from Indian companies Taxable Taxable Taxable

 Ordinarily Not Ordinarily Non-
Type of Income
Resident Resident Resident

15. Dividend from foreign companies Taxable Not Taxable Not Taxable

16. Income from mutual funds in India Taxable Taxable Taxable

17. Income from mutual funds outside

Taxable Not Taxable Not Taxable
India

18. Pension from former employer in

Taxable Taxable Taxable
India

19. Pension from former employer

Taxable Not Taxable Not Taxable
outside India

20. Rental income from leasing

Taxable Taxable Taxable
machinery in India

21. Rental income from leasing

Taxable Not Taxable Not Taxable
machinery outside India

22. Royalty from patents used in India Taxable Taxable Taxable

23. Royalty from patents used outside

Taxable Not Taxable Not Taxable
India

24. Lottery winnings in India Taxable Taxable Taxable

25. Lottery winnings outside India Taxable Not Taxable Not Taxable

Summary:

 As an ordinary resident, Mr. Rajesh Kumar's global income is taxable in India.

 As a Not Ordinarily Resident, only income earned or accrued in India, or derived from
a business controlled or a profession set up in India, is taxable.

 As a Non-Resident, only income earned or accrued in India is taxable.

COMPATRISON OF INDIAN AND UAE TAX SYSTEM

1. India's Tax System

 Residential Status Determination:

 Ordinarily Resident (OR): An individual is considered OR if they satisfy both of the

following:

 They have been a resident in India for at least 2 out of the 10 preceding years.

 They have stayed in India for at least 730 days in the 7 preceding years.

 Not Ordinarily Resident (NOR): An individual is considered NOR if they do not

satisfy both of the above conditions but have stayed in India for 182 days or more in the
relevant financial year or 60 days in the financial year and 365 days in the preceding four
years.

 Non-Resident (NR): An individual is considered NR if they do not satisfy the

conditions for OR or NOR.

Tax Incidence:

 Ordinarily Resident: Global income is taxable.

 Not Ordinarily Resident: Income earned or accrued in India is taxable. Income earned
or accrued outside India is taxable only if it is derived from a business controlled in India
or a profession set up in India.

 Non-Resident: Only income earned or accrued in India is taxable.

2. UAE's Tax System

Residential Status Determination:

 Resident: An individual is considered a resident if they are physically present in the UAE
for at least 183 days in 12 months or have their principal place of residence and business in
the UAE.

 Non-Resident: An individual is considered non-resident if they do not meet the criteria for
residency.

Tax Incidence:

 The UAE does not impose personal income tax on individuals. Therefore, there is no
distinction in tax incidence based on residential status for individuals in the UAE.
However, UAE residents are subject to other types of taxes such as VAT and corporate
tax on certain businesses.
ASSUMPTIONS

1. Residency Data: The information for FY 2015-16 to FY 2010-11 is assumed to be non-

resident status based on the provided details. Exact details are required for precise
calculation.
2. Income Tax Act Compliance: All calculations are based on the current Income Tax Act
provisions applicable for the assessment year 2021-22.
3. Global Income Consideration: For an ordinarily resident, global income is considered
taxable, irrespective of the source.
4. Foreign Income for NOR: For a not ordinarily resident, income from a business
controlled or a profession set up in India is considered taxable even if earned outside
India.
5. Non-Resident Taxation: For a non-resident, only income earned or accrued in India is
taxable, ensuring clear separation of foreign income.
6. Split Year Treatment: Periods of stay are considered in their entirety within the
respective financial years.
7. Assumed Days for Historical Years: For simplicity, assumed equal number of days
(120) for historical years where exact data is not provided.
8. Tax Incidence: Based on the type of income and the residential status, the tax incidence
is determined by the location of earning and the control of the source.
9. Specific Provisions: Any specific provisions, deductions, or exemptions under the
Income Tax Act are not considered in this scenario and would need to be factored in for
detailed tax planning.

In India, Mr. Rajesh's residential status (Ordinarily Resident, Not Ordinarily Resident, Non-
Resident) significantly affects his tax liability, with OR status leading to global income being
taxable. In contrast, the UAE does not impose personal income tax on individuals,
simplifying the tax scenario for residents. Applying domain-specific concepts such as DTAA
and foreign tax credits can optimize tax obligations and prevent double taxation. This
comprehensive approach ensures Mr. Rajesh understands his tax liabilities based on his
residential status in different countries.
FINDINGS & SUGGESTIONS

Findings

1. Residential Status in India:

 Mr. Rajesh Kumar is classified as an Ordinarily Resident (OR) in India for FY 2020-
21, which means his global income is subject to tax in India.

 If he were classified as Not Ordinarily Resident (NOR), only income earned or

accrued in India and income from business/profession controlled in India would be
taxable.

 As a Non-Resident (NR), only income earned or accrued in India would be taxable.

2. Tax Incidence on Various Types of Income:

 As an OR, all 25 types of income listed would be taxable in India, including foreign
income.

 As a NOR, only income earned or accrued in India and income from a business or
profession controlled in India would be taxable. Many foreign income types would
not be taxed.

 As an NR, only Indian income would be taxable, and all foreign income would be
exempt.

3. Comparison with UAE Tax System:

 The UAE does not levy personal income tax on individuals. Residency in the UAE is
determined based on physical presence (183 days) or primary residence/business
location.

 If Mr. Rajesh were a resident in the UAE, he would not be liable to pay personal
income tax on his earnings, significantly reducing his overall tax burden.

4. Application of Double Taxation Avoidance Agreement (DTAA):

 DTAA provisions between India and UAE can help avoid double taxation. Income
taxed in the UAE could potentially receive a credit against Indian tax liabilities.
SUGGESTIONS
1. Optimize Residency Status:
 Plan Stays Strategically: Mr. Rajesh should plan his stays in India and abroad to
optimize his residency status. Reducing his days in India to below 182 days can
classify him as NR, thus making only Indian income taxable.
 Explore NOR Status: If maintaining his presence in India is necessary, ensuring
he qualifies as NOR can reduce his tax liabilities by excluding many foreign
incomes.
2. Utilize DTAA Provisions:
 Claim Foreign Tax Credit: Ensure that taxes paid on foreign income in countries
with which India has DTAA are credited against his Indian tax liability.
 Avoid Double Taxation: Properly document and report foreign income and taxes
paid to benefit from DTAA provisions.
3. Income Structuring:
 Leverage Exemptions and Deductions: Utilize all available deductions and
exemptions under Indian tax laws (e.g., Section 80C, 80D) to reduce taxable
income.
 Reorganize Income Sources: Restructure income sources to favor those with
lower tax rates or exemptions. For instance, receiving more income as dividends
from Indian companies (which may be exempt under certain conditions) instead
of salary can reduce tax liability.
4. Consider Relocation to Low/No Tax Jurisdictions:
 Move to UAE: Relocating to the UAE, which does not impose personal income
tax, can significantly reduce Mr. Rajesh’s overall tax burden. Ensuring he meets
the UAE's residency criteria (183 days) would provide tax-free global income.
 Permanent Establishment in UAE: If feasible, establishing a permanent business
presence or home in the UAE can provide further tax advantages.
5. Professional Tax Planning:
 Hire a Tax Advisor: Engage with a tax advisor familiar with both Indian and
UAE tax laws to create a personalized tax plan.
 Regular Reviews: Conduct regular reviews of tax planning strategies to adapt to
any changes in tax laws or personal circumstances.
By strategically managing his residency status, leveraging DTAA provisions, structuring his
income efficiently, and considering relocation to a tax-friendly jurisdiction like the UAE, Mr.
Rajesh Kumar can significantly reduce his tax burden. Professional tax planning and regular
reviews are essential to adapt to changing laws and personal circumstances, ensuring optimal
tax efficiency.
CONCLUSION
In conclusion, this assignment has provided a comprehensive exploration into the
complexities of determining residential status and its implications on tax incidence in India,
juxtaposed with the tax system of the UAE. Through the case scenario of Mr. Rajesh Kumar,
we analyzed the criteria for determining his residential status as an Ordinarily Resident (OR)
for the financial year 2020-21, highlighting how his global income is subject to taxation in
India. The detailed calculations and categorization of various income types underscored the
diverse tax implications based on his residential classification—Ordinarily Resident, Not
Ordinarily Resident (NOR), or Non-Resident (NR).

Comparatively, the UAE’s tax system, devoid of personal income tax, presented a stark
contrast, emphasizing the potential benefits of residency in a tax-friendly jurisdiction. The
findings underscored the importance of strategic tax planning, leveraging Double Taxation
Avoidance Agreements (DTAA), and optimizing income structuring to minimize tax
liabilities effectively. Suggestions such as optimizing residency status, utilizing DTAA
provisions for foreign tax credits, and considering relocation to jurisdictions like the UAE
were proposed to mitigate tax burdens while ensuring compliance with relevant tax laws.

This assignment equips students with practical insights into navigating the complexities of
international taxation, emphasizing the significance of accurate residential status
determination and strategic tax planning in a globalized economy.