Income Tax--Current Issues

Practice Update

V.K. Subramani

MEANING OF 'LIABLE TO TAX'

The Finance Act, 2021 has inserted a new clause (29A) in section 2 so as to define the term 'liable to tax'. The definition can be dissected as under: (i) It is in relation to a person and with reference to a country; (ii) It covers cases where there is income-tax liability on such person under the law of that country; and (iii) It includes a person who has subsequently been exempted from such liability under the law of that country.

A cursory glance of the definition would show that it covers a person who is liable to income-tax under the law of a country and also cases where such liability exists but it is exempted subsequently. For example, if a taxpayer has income in India and such income is exempted say by section 10AA such taxpayer satisfies the test of liable to tax in respect of such income.

Following provisions use the expression 'liable to tax':

Section 6(1A) where a person being a citizen of India having income from foreign sources and who has total income in India exceeding Rs. 15 lakhs, shall be deemed to be resident of India if he is not liable to tax in any other country.

Section 10(23FE) in the case of pension fund created or established under the law of a foreign country which is not liable to tax or if liable to tax, exemption from taxation for all its income has been provided by such foreign country. These pension funds have to satisfy various other conditions enumerated in section 10(23FE) to be eligible for the tax exemption in India.

Agreements with foreign countries or specified territories under section 90 and agreement between specified associations for double taxation relief when adopted by Central Government which is governed by section 90A, the definition contained in section 2(29A) is relevant and applicable.

Since the term is now defined in the Act itself, in case it is not defined in the tax treaty recourse must to the term so defined in the domestic law. Also, fiscally transparent entities may not pass this test and hence they may fall outside the scope of this beneficial definition.