RESIDENTIAL STATUS
4.1 Residential
status - definition :
The
definition of a resident for an individual is now made comparable with the
definition under income tax. Earlier, the two definitions were totally
different causing considerable confusion.
The FEMA bill, 1998 had proposed a change in the
definition. The new definition would determine the residential status based on
physical stay rather than other detailed provisions.
However, this definition would have created problems for people
changing residential status. They would have incurred avoidable problems during
the year in which -
(i)
A resident becomes a non-resident: or,
(ii) A non-resident
becomes a resident.
This matter was brought to the attention of “Murli Deora
Committee” and the Reserve Bank of India. The final Act now removes this
problem.
4.2 Intention
:
There was a misunderstanding in some circles about residential
status under FERA. They claimed that a person’s residential status is
determined solely by his intentions. Even if he stayed within India for long
periods, if he had an intention to settle abroad, he would still be a
non-resident. This understanding was incorrect. Even under FERA, the intention
had to be supported by facts and circumstances.
The term “intention” was given a “go-bye” in the FEMA bill, 1998.
FEMA Act reintroduces the term. It should be noted that the term “intention”
must be accompanied by facts. A person cannot stay in India and say that - “he
has an intention of working abroad, so he is a non-resident”. He must go
abroad, stay abroad and take-up employment or business abroad to say that he is
a non-resident.
4.3 Resident
Individual - definition u/s. 2(v) - Simplified
The definition in the section is difficult to understand. Language
is complex using two negatives in one sentence. For the sake of easier
understanding a simplified version is given below.
(i) A
person resident in India means a person who resided in India for a period of
182 days during the previous financial year.
A. Following persons
will not be considered as a “resident in India”.
A person who has gone out of India; or, a person who stays outside
India-
In any of the following circumstances -
(a) for employment
outside India; or
(b) for carrying on a
business or vocation outside India; or
(c) for
any other purpose - if the circumstances show that he has an intention of
staying abroad for an uncertain period.
B. A
person who had resided abroad for 183 days or more during the preceding
financial year, is a non-resident.
In the following circumstances, he becomes Indian resident.
When he has come to India; or, if he stays in India -
In any of the following circumstances -
(a) for employment
in India, or
(b) for carrying on
business or vocation in India, or
(c) for
any other purpose - if the circumstances show that he has an intention of
staying in India for an uncertain period.
4.4 Analysis :
4.4.1 It
may be noted that when it comes to employment, business or vocation, the length
of the period is not relevant. A resident may go abroad and take up employment.
On the first day itself he becomes a non-resident.
4.4.2 In
case a person comes to India for a purpose other than commercial purpose (like
employment or business), situation is different. For example, a tourist comes
to India. If he comes with a definite plan for returning after two years; then
he is not a resident in India.
4.4.3 Mr. A
comes to India for family marriage etc. Then some other cause prevents him from
returning. Then a third cause causes his continuous stay in India. Like that he
stays here for more than six months. If he has no employment and no business in
India; and he has substantial employment or business abroad plus house / office
etc. abroad; he will be able to establish that he is still, a non-resident. It
should be noted that his intention of remaining a non-resident has to be
supported by facts.
4.5 Notes
4.5.1 The
concept of financial year is brought into FEMA for the first time. The term
“Financial Year” has not been defined. Prima facie it should mean the period
commencing from the 1st day of April in a year and ending on the 31st
day of March in the next year.
This term can have different meanings. It would be better if the
term is defined in rules / notifications.
4.5.2 Period of 182
days
The language used in the section makes it clear that it is not
necessary that there should be a continuous period. All different periods
during the year have to be totaled up. Altogether if the stay in India is more
than 182 days, the person would be an Indian resident.
Departure / Arrival
If a person has traveled to and from India several times in a
year, should all the days of departure and arrival be counted as “in India” or
“outside India”!
There is, no guideline to this effect under FEMA. Even under
Income-tax Act, the law does not provide a guideline.
Ideally, the FEMA rules should clarify.
A safe position to be adopted until rules clarify the position can
be - consider the date stamped by the immigration office at the airport / port.
For both the dates stamped on the passport, the person is in India even for a
fraction of time. Count him as “in India”.
If a rule clarifies the position, more reasonable position can be
adopted. For example, for the day of departure, the person is considered
“outside India” whereas for the date of arrival, he is considered “inside
India”.
4.5.3 Under
FERA, the position was, that the moment a person goes abroad for taking up
foreign employment / business, he became a non-resident. Under FEMA bill, 1998;
that position was given a “go-bye”. Professional bodies represented that this
would create difficulties in the year of change in residential status.
FEMA Act, 1999 reintroduces the concept. Now an Indian resident
becomes a non-resident immediately when he takes up a foreign job and goes
abroad.
4.6 Definition of
Resident - Probable Errors
4.6.1 There
is a gap between the definition of “person” under section 2(u) and the
definition of a “person resident in India” under section 2(v).
The person is defined to include individual, HUF, firm,
association of persons (AOP) etc. Each of these categories are separate and
independent categories.
While defining a person resident in India no separate definition
for HUF, firm, AOP etc. are given. Clause (ii) defines residential status of a
body corporate. If it is registered or incorporated in India, it is resident in
India. However, an HUF and an AOP are not bodies corporate. They do not require
any registration or incorporation. Their status is still separate from the
status of their members. Legally, an HUF’s status cannot be determined by the
status of its Karta or any or all of its members. There must be a separate
criteria for determining the status of an HUF. Similar is the case for all
other unincorporated bodies like AOP, trust etc. Even a partnership firm may or
may not be registered. For all these entities, “control and management”
criteria maybe adopted.
4.6.2 Can
the Reserve Bank make provision for residential status of HUF etc. by
notifications or circulars?
RBI derives its powers to regulate from FEMA. It cannot
independently make provisions without substantive provision in the law.
Correctly speaking, all FEMA provisions should fail as far as HUF, trust etc.
and other unincorporated bodies are concerned.
4.6.3 The
position under FERA was also similar. Entire definition for a “resident” under
section 2(p) was pertaining to an individual. Firm was covered under section
73(1)(c). A branch was also covered under section 73(1)(d). However, a limited
liability company incorporated under the Companies Act in India or incorporated
outside India was not covered by any definition as far as its residential
status was concerned. For all these years nobody challenged RBI’s powers to
regulate a company under FERA and the position continued. More detailed
discussion on the subject will be given in the detailed commentary to be
published later on.
4.6.4 Another mistake
made under FERA has been continued under FEMA.
Section 2(p) of FERA defined the residential status as… “a person
resident in India…” . Entire definition provided for citizenship, marriage,
etc. These provisions established beyond doubt that the definition covered only
an individual. A non-individual person cannot get married. This means
that for a non-individual person, it could not be decided whether it is a
resident or non-resident. However, somehow, RBI continued to regulate
non-individuals also.
Section 2(v)(i) of FEMA stills defines … “a person residing
in India … “ . Here also the definition makes provisions for physical stay,
taking up employment etc. All these provisions can be applied only to an individual.
Hence the definition clause should have been - “an individual residing in India
…”. When a “person” is defined to include non-individuals, it is incorrect to
make a definition pertaining to individuals and using the term “person”.
4.6.5
Under FERA, section 73 made provision
for partnership firm. Under FEMA there is no such separate provision for the
residential status of a firm.
4.7 Assuming
that the financial year means the period April to March, let us see further.
If
one has to determine a residential status of a person as on say 1st
July 1999, one has to look at the period 1st April 98 to 31st
March 99. If a person resides in India for more than 182 days, he will be
considered as a resident in India.
There are however two exceptions given in clauses A and B of the
section 2(v).
4.7.1 The
first exception in clause A talks about a person who is in India, but goes out
or stays out of India for:
- employment outside India, or
- business outside India, or
- any purpose which indicates his intention to stay outside India
for an uncertain period.
Such persons are not included in the definition of a “person
resident in India”. i.e. they will be considered as non-residents.
This brings us to an issue - whether the residential status of a
person applies for a year, or from a particular date.
4.7.2 We may consider
the issue as under :
The starting point is the number of days in the preceding
financial year. If a person is in India for more than 182 days in a preceding
financial year, he is a resident.
However,
If he goes
out of India, then from that time, or
If he stays
out of India, then for that period,
he is a non-resident.
Let us see some examples
4.7.3 A
person goes out of India for employment on 1st July, 1999. He was in
India for 182 days in 1998-99.
To determine his residential status in 1999-2000, we have to see
the days in 1998-99. As it exceeded 182 days, he is a resident. However, from
1.7.99, he becomes a non-resident as he “goes” out of India, for employment
abroad.
Upto 30th June, he is a resident.
If a view is taken that the residential status is for a year, and
not from a particular time, then one will have to wait for nine more months
(upto 31st March 2000) to determine his status. This will create
difficulties as a person should know at a point of time whether he is a
resident or a non-resident.
Hence a harmonious view will be to treat a person resident from
the date he takes up employment abroad.
In 2000-2001, we have to see the number of days the person is in
India during 1999-2000. As he will be in India for less than 182 days, he will
be a non-resident.
4.7.4 In
the above example, assume that the person goes out for employment on 1st
January, 2000.
Primarily, he is a resident in 1998-99, as he was in India for
more than 182 days.
In 1999-2000 also, he is in India for more than 182 days.
Therefore, in 2000-2001, he will be again a resident.
However, he has left for employment on 1st January
2000. Therefore for 1999-2000, he is a resident upto 31st December,
1999. From 1st January 2000, he is a non-resident since a person who
goes out of India for employment is a non-resident.
In 2000-2001, as he “stays”
outside India for employment, he is a non-resident from 1st
April 2000, although he was in India for more that 182 days in 1999-2000.
4.7.5 The
second exception is covered in Clause B. It speaks about persons who were
outside India, & have come to India.
If a person comes to India for any purpose other than the ones
mentioned below, he will not be “included” in the definition of resident :
- Employment in India, or
- business in India, or
- any purpose which indicates his intention to stay in India for
uncertain period.
Therefore he will be a non-resident .
Thus if a person comes as a tourist, or to do charity work, or any
purpose (not for employment or business in India), AND , he comes for a certain
period of time (say 2 or 3 years), he will be a non-resident.
Thus a person may come to India and stay in India regularly for
more than 182 days for 10 years. He may claim that his stay is not certain. He
is sure to go back. Further he may not do any business or undertake any
employment in India. Still he may be a non-resident in India.
Only if he comes for employment, business or for uncertain period,
he will be “included” as a person resident in India.
Is this the intention? By bringing in the criteria of
“intention” within the definition, the controversies under FERA continue. A
clarity in law would have helped.
4.8 Residential Status of Partnership
firms, etc.
A
person other than individual, will be considered as a resident, if it is
registered or incorporated in India. (S.2(v)(ii).
An office, branch or agency in India, which is owned or controlled
by a person resident outside India, will be considered as resident in India.
(S.2(v)(iii)).
An office, branch or agency outside India owned or controlled by a
person resident in India, will also be considered as resident in India.
(S.2(v)(iv)).
This is different from the situation under FERA. Under section
73(1)(c), a branch was considered as a resident where it was situated. If a
resident in India opened a branch in U.K., under FERA, the branch was a
non-resident. Under FEMA the branch is a resident and therefore it will be
subject to FEMA controls, making it difficult to operate outside India.
4.9 When does a
non-resident become a resident ?
A person resident outside India comes to India on 1.8.2000,
does he become a resident from 1.8.2000 ?
Yes. On the
day he takes up employment and comes to India, he becomes Indian resident.
As discussed
earlier, change in residential status becomes effective from the date of travel
and employment. The position will be the same whether an Indian resident goes
abroad or a non-resident comes to India.
Getting
Indian citizenship is a difficult and time consuming process. Becoming Indian
resident is very easy.
Introduction | Transition from FERA to FEMA |
Convertibility
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