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Determining an individual’s residency status: some taxation anomalies

The Finance Act, 2022 has virtually decided that a Pakistani citizen can be taxed in Pakistan even if he never comes to Pakistan. This is a bad law, which is seriously required to be examined. In the following paragraphs this subject is discussed as under:

The residential status of an individual is governed by Section 82 of the Income Tax Ordinance, 2001. It states as under:

82. Resident individual. — An individual shall be a resident individual for a tax year if the individual —

(a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and 1 [eighty-three] days or more in the tax year;

(c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year

(d) being a citizen of Pakistan is not present in any other country for more than one hundred and eighty-two days during the tax year or who is not a resident taxpayer of any other country.

Before the amendment by the Finance Act, 2022 the definition was as under:

182. Resident individual. — An individual shall be a resident individual for a tax year if the individual —

(a) is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and eighty-three days or more in the tax year;

(c) is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year.

For tax purposes, persons are classified as residents or non-resident in Pakistan. This classification is relevant for the reason that under the Ordinance there are two kinds of incomes. These are Pakistan-source income and foreign source income as determined under Section 101 of the Ordinance. In the case of a person resident in Pakistan both Pakistan and foreign source income are taxable. Whereas for persons who are non-residents only Pakistan source income is taxable. The concept of ‘resident but not ordinarily resident’ as was contained in the repealed Income Tax Act, 1922 has not been adopted by repealed Income Tax Ordinance, 1979 and Income Tax Ordinance, 2001. The Indian Income Tax Act, 1961 still carries the concept of ‘resident but not ordinary resident’.

Determination of residence for a person being an individual has been taken up in Section 82 of the Ordinance. Under the law which was applicable after the amendment in the Finance Act 2022 the only criterion for determining the residential status of an individual for tax purposes is ‘stay’ in Pakistan in that year. If a person stays for a period or periods amounting to one eighty three (183) days or more then the said person is treated as resident person for tax purposes. All other persons are treated as non-resident for tax purposes. The dates of arrival and departure are included as to be in Pakistan for the purposes of stay in Pakistan. Such dates are reflected in the entry or exit stamps made on immigration counters established by the Government of Pakistan.

This definition of residence for an individual, where only the stay in Pakistan of 183 days is the determining factor was introduced in the Income Tax Ordinance, 2001 by Finance Act, 2003. Before the amendment this definition was in line with the definition contained in the repealed Income Tax Ordinance, 1979 and the Income Tax Act, 1961 which included a clause as under a condition for determining the residence of an individual:

“(b) is present in Pakistan for a period of, or periods amounting in aggregate to, ninety days or more in the tax year and who, in the four years preceding the tax year, has been in Pakistan for a period of, or periods amounting in aggregate to, three hundred and sixty-five days or more; or”

Through the Finance Act, 2019 the aforesaid condition was reintroduced; however, the same was again deleted by the Finance Act, 2021 on the premise that many persons became resident on account of their stay in Pakistan due to Covid 19.

In the Finance Act, 2022 another substantive change has been made in the provisions relating to residential status for individuals. Now a relationship has been created with citizenship of Pakistan which is not a generally acceptable norm except in the USA2.

The citizenship in Pakistan is governed by the Citizenship Act, 1951 and that status has nothing to do with presence in Pakistan or earning of income in Pakistan. After the amendment for tax year 2023 [period which commenced on July 1, 2022 and will end on June 30, 2023] and onwards an individual will be treated as a tax resident in Pakistan if:

a. is present in Pakistan for a period of, or periods amounting in aggregate to, one hundred and 1 [eighty-three] days or more in the tax year;

b. is an employee or official of the Federal Government or a Provincial Government posted abroad in the tax year;

c. is a citizen of Pakistan who is not present in any other country for more than one hundred and eighty-two days during the tax year;

d. is a citizen of Pakistan who is not a resident taxpayer of any other country.

An individual is treated as a person resident in Pakistan in the following circumstances:

e. Physical presence in Pakistan for more than 183 days in the year being the period July 1 to June 30;

f. An employee or official of Federal or Provincial Government posted abroad where the physical stay in Pakistan is less than 183 days;

g. A citizen of Pakistan where stay in any other one other country for less than 182 days in the financial year; and

h. A citizen of Pakistan who is not a tax resident of any other country;

The situations referred to in (c) and (d) are ‘deemed resident’. If Mr A is a citizen of Pakistan and he has never been to Pakistan he will be treated as tax resident for Pakistan if his stay in one other country is less than 182 days and he is not a tax resident of any other country.

In another case if the stay in Pakistan is for 160 days and stay in State A and State B is for 100 and 105 days then the person will be deemed to be a Pakistani tax resident even if he has no income in Pakistan for any past year and for the year under consideration. Another extreme is staying in State A, B and C for 100, 100, 165 days and all the states consider the person as non-resident as the general basis of considering resident is 183-day presence in that state. This provision is effectively extraterritorial and the validity of this provision is required to be examined in that perspective. In practical sense the case as referred to in (c) is not implementable as staying in another country for certain days, falls outside Pakistan’s regulatory system. It is a unique concept not applicable anywhere in the world.

A search about the source from where our legislation adopted the aforesaid provision revealed that we have copied it from India but in an incorrect manner. In India in 2020 a provision was inserted as under;

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees 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 of similar nature.

Clause (IA) was introduced in India in 2020. The Pakistan legislature has attempted to copy the Indian legislation, however, they have missed the main subject which is required to be brought into the tax net.

In India there is still a concept of being a ‘resident but not ordinarily resident’ and the concept of deemed resident has been introduced for that classification. When a person is resident but not ordinarily resident then under the provision of Indian Income Tax Act, 1961 the tax incidence is as under:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

This means that if a person is a deemed resident then only so much of the foreign income will be taxed in India which accrues or arises to him outside India shall be so included if it is derived from a business controlled in or a profession set up in India. This has a very limited scope and income outside India has a direct relationship with India. This has been explained in India as under;

Implication of change in residency provisions

The moot question that arises is how do these changes impact Indian citizens or Person of Indian origin (PIOs) who qualify as NORs in India. As discussed earlier, an NOR is taxable in India with respect to income from sources outside India if such income is derived from a business controlled in India or a profession set up in India. However, a non-resident is not taxable in India with respect to such income from sources outside India.

Accordingly, where Indian citizens who qualify as deemed residents or Indian citizens/ PIOs visiting India who qualify as NORs and who have income in foreign jurisdictions from business controlled in India or profession set up in India, would now need to determine such income and offer it to tax in India, if the specified conditions are met. Whether a business is considered as being controlled from India would, in turn, depend on factors such as where are the key managerial personnel located, jurisdiction of holding company, etc.

Also, where taxability arises in India due to change in residential status, tax compliances like payment of advance tax, filing of tax return, etc., follow. It is important to note that non-compliance with tax laws can result in interest, penalties and even prosecution in certain cases.

The law as introduced in Pakistan by the Pakistani legislature is not a recommended law unless Pakistan is considering adopting the citizenship basis for determining the tax incidence. In case of Pakistan this will be a futile attempt as Pakistan allows revoking the citizenship at will which may be reinstated whenever required. Even the USA is facing serious difficulties in maintaining the tax incidence on citizenship basis and wealthy people adopt many permissible methods to avoid tax in the USA. The action of the legislature is apparently wrong and undesired. In this situation it is suggested that the provisions as contained in the law as introduced in 2019 are to be reintroduced and if the citizenship basis of taxation is to be adopted then it should be restricted to that related to Pakistan as has been done in India. We cannot afford to have legislation not in line with generally accepted norms.

1. The text of law prior to amendment by Finance Act, 2022.

2. Individuals—In general a U.S. citizen or resident, is required to file a return depending on three factors. 1. gross income. 2. filing status. 3. age. Gross income includes all income you receive in the form of money, goods, property, and services that are not exempt from tax. It also includes income from sources outside the United States.

Syed Shabbar Zaidi, "Determining an individual’s residency status: some taxation anomalies," Business recorder. 2022-08-24.
Keywords: Economics , Income Tax , Tax Ordinance , Tax resident , Tax compliances , Pakistan , India , United States , USA , US , NOR , IA

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