Gulf NRIs Stranded by Iran Conflict Face Risk of Taxation as Indian Residents

Gulf-Based Indians Stranded in India May Face Tax Hit

Key Figures:

• 182 days: the number of days required to be considered an Indian tax resident
• 365 days: the number of days in the preceding four financial years required to be considered an Indian tax resident
• 35%: the corporate tax rate on foreign companies in India

Background

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Travel disruptions caused by the Iran war have left Gulf-based Indians stranded in India, potentially affecting their tax status. According to tax consultants, every additional day spent in India can change an individual's tax residency position. Deepesh Chheda, Partner at Dhruva Advisors, notes that individuals should track their day-count carefully and maintain clear documentation of their travel plans until clarity emerges from policymakers.

Tax Residency in India

An individual's tax residency in India is primarily determined by the number of days physically spent in the country in a financial year. If an individual stays in India for 182 days or more, or for 365 days or more in the preceding four financial years, they are considered an Indian resident. Residency determines how the quantum of income that can be taxed in India, including foreign income.

Potential Tax Liability

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Gulf-based NRIs are taxed at the same rates as Indian residents, but are ineligible for tax rebates on income earned within India. It is too early to assess any potential tax liability on the stranded Gulf residents, but a circular may be issued if needed.

Impact on Companies

Tax consultants flag two additional situations that may warrant attention:

• If senior executives of a foreign company are stranded in India and begin conducting board meetings or making key strategic decisions, tax authorities could argue that the company's Place of Effective Management (POEM) lies in India, potentially treating the foreign company as an Indian tax resident.
• If a UAE resident, who is a partner in a foreign partnership firm, is stranded in India and begins exercising control or management of the company's affairs, tax authorities can argue that the company's control and management are not wholly situated outside India, potentially regarding the partnership firm as a resident in India.

Relief for Indian Residents in the Gulf

Experts say Indians stuck in the Gulf region do not have to worry on the tax front, as most Gulf countries do not levy personal income tax. A clarification from the Central Board of Direct Taxes (CBDT) excluding days of involuntary stay arising from travel disruptions would provide much-needed certainty to affected individuals, similar to the approach adopted during the COVID-19 period.