Non Resident Taxation - How Residential Status of Non-Residents is determined?

 

The last year budget has provided with major changes in determining the residential status of the Non-Resident Indians or Persons of Indian Origin (PIO) for the purpose of filing NRI Income Tax Return in India.
 
These provisions have majorly impacted the residential status as well as liability of NRI Income Tax Return filing in India.  In this article, we will be discussing about changes made in definition of Non Resident Indian.

 
New Rules for determining the NRI Residential status:

1. As per provisions of the Act, a person shall be considered as Non Resident in India in case his period of stay in India during previous year is less than 182 days.  
2. Further, in case period of His stay in India during last 4 years preceding the previous year was less than 365 days and period of his stay during previous year was less than 60 days, even then, He will become Non Resident.    
3. As per Explanation (1A) to section section 6(1) which has been newly inserted, concept of deemed resident has been introduced. As per same, any citizen of India whose total income from India exceeds Rs 15 lac during the previous year shall be deemed to be Resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria.  

4.       Further, the definition of Not Ordinary Resident in India has also been amended. A person is said to be "not ordinarily resident" in India in any previous year if such person is--
(a)   Non-resident in India in nine out of the ten previous years preceding that year, or
(b)   Non Resident in India for more than 729 days during the seven previous years preceding that year.
(c)    A new clause (c) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He is an Indian citizen or a person of Indian origin and His total income from India exceeds Rs 15 lac during the previous year and his period of stay in India is 182 days or more but less than 180 days.
(d)   Further, new clause (d) to section 6(1)(6) has been inserted which provides that a person shall be considered as not ordinary resident if He a citizen of India who is deemed to be resident in India under clause (1A). 
 
It may be noted that as per the amendment in Section 6, the time period reduced to 120 days is only applicable in cases where the total accrued income in India of the visiting person in a particular financial year is more than Rs. 15 Lakhs. As was the case earlier, if a person’s total income earned in India in a fiscal year is up to Rs. 15 Lakh, they will continue to have their NRI status, even if their stay period has not exceeded 181 days.
 
The visiting Indian person is required to keep a track of all his taxable income accrued in India as well as the number of days of their stay in India. This is to be done because in case the Indian taxable income exceeds the mark of Rs.15 Lakhs, then the provisions related to stay period of more than 120 days will be applicable on them.
 
Any NRI with a stay period of 120 days or more and whose taxable income has exceeded Rs. 15 Lakhs, is required to check whether their stay period in the immediate preceding 4 years is 365 days or more. If their stay period in the preceded immediate 4 years is 365 days in total then they will be treated as a resident Indian and not NRI for the tax purposes. E assessment income tax
 
However, such individuals will be treated as Resident but Not Ordinarily Resident (RNOR) providing them with a relief that their income accrued outside India will not be taxable under Foreign Income Tax in India.
 
Why aforesaid determination of Residential status in case of Non Resident Indians is important?
 
Determination of residential status is important to correctly compute the Income Tax Liability of Non Resident and also for filing NRI Income Tax return.
 
This is due to the fact that unlike Residents, whose global income is taxable in India, in case of NRIs, only income accrued or arise or deemed to be accrued or arise and/or received in India is taxable. Therefore, in case any NRI does not have any income from India, there is no need to file NRI Tax return in India.
 
There may be situation that a person has been NRI for some years but becomes Resident in a particular year, in such case, for that year, his income from foreign country will also become taxable in India and in such case, he need to file his Income tax return from Indian as well as foreign source. However, as per DTAA applicable between both countries, he would be entitled to claim proportionate credit of taxes paid in foreign country.

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Mandatory conduct of an Internal Audit

Internal audit is an evaluation process for companies or organization that is performed by internal auditors. It is a tool that is used to examine the company’s financial as well as non-financial activities and operations. Through the internal audit process, a company is made aware about the prospective risk, compliance status, and operative loopholes and also recommended about the measures and steps that it can take to improve efficiency and effectiveness. The internal audit in India is governed by the Companies Act, 2013, just like cost audit, tax audit, secretarial audit and transfer pricing audit.

Who must have Internal Audit?

The Companies Act, 2013 mandates all the listed companies and certain unlisted public companies to have the internal audit conducted. The following classes of unlisted companies are required to have internal audit:

·         Having paid-up capital exceeding Rs. 500 million in the previous financial year.

·         Having turnover of Rs.2 billion or above in the previous financial year.

·         Having outstanding loans and liabilities exceeding Rs.1 billion

·         Having outstanding deposits for Rs. 250 million

Also, the following classes of Private Companies are required to conduct internal audit-

·         Having turnover of Rs.2 billion or above in the previous financial year.

·         Having outstanding loans and liabilities exceeding Rs.1 billion in the previous financial year.

Who should conduct an internal audit?

For the purpose of conducting Internal Audit in a company, it is recommended to appoint a chartered accountant or a cost accountant as internal auditor to perform the audit.

Related Articles: Major Challenges of Internal Auditing in Future

Is there a penalty for non-compliance of Internal Audit?

There are no specific penal provisions that have been specified by the Companies Act, 2013 for the non-compliance of internal audits in a company or organization. Any sort of non-compliance is prosecuted as per Section 450 of the act, as there is no punishment specified for not conducting an internal audit. In case there is any non-compliance by the auditor or the company, both are liable to pay a fine of Rs.10000.

Are there any key guidelines for conducting an internal audit?

The Securities and Exchange Board of India (SEBI) through Clause 49 of the Listing Agreement has introduced mandatory corporate regulatory governance that is applicable to the listed companies only. As per the clause an audit committee of the company is required to review the following while internal audit:

·         Internal audit report that relates to the internal control weaknesses.

·         Whether the internal audit has been made functional in a proper order after thoroughly reviewing the internal audit department’s structure, frequency of audits, seniority of the officer heading the department, recruitment of the personnel and the remuneration terms of the chief internal auditor.

·         The suspicion of the fraud or forgery or internal control system failure that have been found in the investigation in the internal audit service provided by the internal auditor.

·         The acceptance of responsibility for internal controls effectiveness, disclosure made to the auditor, any deficiencies in the operations and its rectification by the board of directors is to be certified by the Chief Executive Officer (CEO) or the Chief Financial Officer (CFO).