Question

Describe the concept of residential status and incidence of tax liability?

Answer 1

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YOUR ANSWER:

Tax incidence on a taxpayer in India depends upon his residential status. Whether an income earned by an individual, in or outside India, is taxable in India depends on the residential status of the individual rather than on his citizenship. People are often under the wrong impression that taking up foreign citizenship helps obtain tax benefits. However, the Income Tax Act, 1961 (Act) does not provide tax benefits on the basis of a person’s citizenship.

Taxing jurisdiction

• There are three different principles adopted internationally to identify the tax jurisdiction of the income of an individual. These principles—citizenship principles, source principle and residence principle are adopted by different countries as per their choice.
• In the US, income is taxed based on citizenship and source based principles, whereas India follows the residence based and source based taxation system.
• Under citizenship based taxation, income is taxed on the basis of citizenship of the taxpayer, whereas under residence based taxation system, income is taxed on the basis of residential status of the taxpayer.

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