Determination of residential status under the Indian domestic tax law is the very basic step that one starts with to determine taxability of an individual on his income. This assumes even more significance for cross border movements when you have two or more jurisdictions involved and specially where income outside India is also prevalent. If the individual qualifies as a resident and ordinary resident (ROR) of India in any FY then his/ her global income in taxable in India and there is a requirement to report foreign assets in the India tax return. The next step in such cases is to determine the residential status of the individual as per the Double Tax Avoidance agreement (treaty), if any, between India and the other country to determine relief available to the individual under the respective treaty. The provisions of residency then must be examined as per the relevant treaty article.
In the context of US citizens and greed card holders we will need to consider the India-USA treaty. In the said treaty, article 4 deals with residency. Article 4(1) determines the basic residency. As per the said article the term, ’resident of a Contracting State’ means any person who, under the laws of that state, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.
Hence, for an individual, he could be a resident of India basis the residence or any other criterion of similar nature (i.e., days of stay) and a resident of US based on citizenship/ green card.
Therefore, the tie-breaker tests as per Article 4(2) of the said treaty comes into play. The tie-breaker rules provide for a sequential test
- Availability of permanent home;
- Centre of vital interest;
- Habitual abode; and
- Nationality.
Each of these tests are sequential i.e., if you resolve the tie in the first you do not go to the subsequent rules. Also, these tests/ rules are extremely subjective in nature and could vary basis every individual’s fact pattern and circumstances. Commentaries on this subject published by OECD, UN as well as several renowned international authors would need to be considered while firming up any position in relation to Article 4 of the Indo-US or any other treaty.
Depending on which country (India or US) the individual is treated as an ultimate tax resident of, his/ her income taxability and relief under the Indo-US treaty is determined. Generally, from an Indian perspective, for an individual who qualifies as an Indian tax resident as per India-USA treaty, his global income (including US income) is taxable in India. India is also obliged to give a credit of US federal taxes paid on such US sourced income. This may also have to be examined by the individual concerned from a US tax law perspective. Especially considering Article 1(3) of the India US tax treaty (savings clause) wherein the US preserves the right to tax its citizens and residents as per their domestic tax laws notwithstanding the treaty.
