Taxsutra Pro Issue 6 : Analysing India's New Definition Of Liable To Tax

Finance Act, 2021 introduced a definition for the phrase ‘liable to tax’. The definition intends to clarify the meaning of the phrase in Indian domestic tax law as well as in an international tax treaty context. In the latter case, significantly the phrase forms part of a primary condition for accessing benefits under most tax treaties, i.e., the residence test. The paper discusses the application of India’s new definition of ‘liable to tax’ in the context of the residence test in article 4 of tax treaties.

The paper has been divided into the following parts: 

I. Main Contentious Issues that have arisen on the Interpretation of Liable to Tax
II. Indian Judicial Precedents on the Interpretation of ‘Liable to Tax’ 
III.Analysis of the Definition:
   1.Analysis of the text 
    2.Impact of the definition on different kinds of persons:
        a)Specific persons or items of income or income from specific activities exempt under domestic law or subject to a special preferential regime- Includes full, partial, conditional and optional exemptions 
         • Exemptions that do not result in taxation only from sources in the country where residence is claimed 
         • Exemptions that result in taxation only from sources in the country where residence is claimed 
       b) No taxing Regime - Person or the income earned by the person is completely excluded from the taxing regime 
       c) Effective Tax to be paid is brought to zero through setting off losses, deductions etc.
       d) Expatriates
       e) Diplomats
       f) Persons subject to remittance-based taxation
       g) Persons subject to territorial tax systems
       h) Fiscally transparent entities – Partnerships and trusts 
       i) Collective Investment Vehicles 
IV.Status of Liable to tax provisions in Article 4 of Indian tax treaties
V. Conclusion