The Risks of Using Tourist Visas for Business Travel

Traveling on a tourist visa for business can lead to tax complications, as seen in M. Mahadevan’s case. The Income Tax Appellate Tribunal ruled Mahadevan a tax resident, taxing his global income due to his use of tourist visas, despite claims of conducting business abroad. Indian tax laws link residency status to days spent in India, with exemptions requiring proper visa alignment. Experts emphasize that visa type is critical for tax compliance, and the case highlights the need for careful navigation of tax laws and international treaties.

Traveling abroad on a tourist visa for business purposes can lead to complications beyond immigration issues—it might also trigger scrutiny from tax authorities back home. The recent case of M. Mahadevan, founder of the bakery chain Hot Breads, serves as a stark reminder of how visa classifications can impact tax obligations and residency status under Indian law.

A Tax Residency Debate

Indian entrepreneurs who frequently travel overseas to manage their businesses often strive to maintain their Non-Resident Indian (NRI) status, which exempts them from paying taxes on their global income. However, their residency status can come under question if they use tourist visas for such trips. This was the situation faced by Mahadevan, whose global income was taxed after authorities determined he was a "resident" for several years, contrary to his claims of being an NRI.

The Income Tax Appellate Tribunal (ITAT) denied Mahadevan certain tax exemptions typically granted to individuals traveling abroad for work or business. The issue lay in his use of tourist visas, which the authorities argued contradicted his claims of conducting business overseas. Despite his assertion that his visits were business-related, the ITAT upheld the tax department’s decision, emphasizing the importance of visa purpose alignment.

Mahadevan's Legal Response

A family representative for Mahadevan expressed disappointment with the ruling but affirmed their intent to explore legal avenues to challenge the decision. "We are reviewing the ITAT's order and believe we have a strong case on merits," the spokesperson said, reiterating their commitment to compliance with all legal and regulatory requirements.

Understanding Residency Rules

Indian tax laws determine an individual's residency status based on the number of days spent within the country. A person is classified as a tax resident if they:

1. Stay in India for 182 days or more in a financial year.

   
   

2. Spend at least 60 days in the current year and 365 days in aggregate across the previous four years.

   
   

The second criterion offers relief to individuals traveling abroad for employment or business by extending the minimum stay requirement to 182 days. However, this exemption was not granted to Mahadevan, as his tourist visa failed to substantiate his claim of conducting business abroad.

The tax authorities relied on data from the Foreigners Regional Registration Office (FRRO) to establish Mahadevan's residency status for the assessment years 2013-14, 2014-15, and 2019-20. Even if his stay in India had been less than 182 days, his use of tourist visas disqualified him from claiming the extended exemption.

Expert Opinions on the Case

Tax experts highlight the critical role of visa types in determining residency and taxation. Ashish Karundia, founder of a chartered accountancy firm, explained that the benefit of extending the 60-day minimum to 182 days is available only if the individual leaves India specifically for employment or business purposes. "An inappropriate visa can jeopardize residency status and complicate the taxation of global income," he noted.

Rajesh Shah, partner at Jayantilal Thakkar & Co, echoed this sentiment, emphasizing that merely spending 182 days outside India does not automatically make someone an NRI. "The type of visa is equally important, but is often overlooked due to ignorance or convenience," he said.

The Role of Tax Treaties

Mahadevan’s case also raises questions about the application of international tax treaties. Despite holding a tax residency certificate from the UAE, the ITAT disregarded it, arguing that Mahadevan’s tourist visa invalidated his claim of conducting business abroad.

Harshal Bhuta, a partner at PR Bhuta & Co, argued that this decision overlooked provisions of the India-UAE Double Taxation Avoidance Agreement (DTAA). "Under the DTAA, an individual staying in the UAE for over 183 days qualifies as a UAE resident, regardless of the purpose of stay. Treaty-based residency rules should apply in cases of dual residency," he explained.

This ruling underscores the importance of adhering to proper visa classifications when traveling abroad for business purposes. Individuals must ensure that their travel documents align with the nature of their activities to avoid tax complications. For entrepreneurs managing global operations, this case serves as a cautionary tale about the intricate interplay between visa types, residency status, and tax obligations.

As Mahadevan prepares to contest the ITAT’s decision, the case highlights the need for clarity and diligence in navigating tax laws, both domestically and internationally.