H P Agrawal: Spare the expatriate tax trouble

FOREIGN ENTERPRISES

The complex tax structure for foreign employees needs to be rationalised. In fact, foreign employees are like ambassadors of their companies in India. They should be treated with utmost consideration. When they feel trapped in the maze of tax laws here, a negative message goes out which certainly creates and anti-investment climate for India.

Expatriate employees are not so concerned about the rates of tax in India because they are comparable with those of other countries. What rattles them is the process of tax administration. It is, therefore, necessary that the tax procedures be simplified.

Under the Income-Tax Act, a resident is liable to pay income tax on his total world income, but a person, who is a non-resident or a resident but not ordinarily resident, is not charged to tax on the income which accrues or arises to him outside India.

Under the provisions of the IT Act that prevailed up to AY 2003-2004, an expatriate employee enjoyed a non-resident status prior to taking up an Indian assignment or in the first year of stay in India and that of "not ordinarily resident" for nine years after he ceased to be a non-resident.

This legal position was, however, upset by the Finance Act 2003. The effect of an amendment made in 2003 is that a foreign employee can claim the status of "not ordinarily resident" for a maximum period of two years.

This certainly discourages the expatriate employees from taking up Indian assignments for more than two years, which does not help the industry or services where expatriates are engaged. It is, therefore, strongly felt that the amendment made by the Finance Act, 2003 should be withdrawn.

A foreign employee while serving in India may often receive the whole or a part of his salary outside India. As per the existing income-tax law, the entire salary income relating to the period of service in India is taxable in India irrespective of its place of receipt.

This creates several practical difficulties in areas like deduction of tax at source by foreign employers outside India, payment of advance tax and final assessment of income and payment of tax in India. The law on this point also needs to be rationalised.

When a part of salary income that is received outside India becomes taxable in India, calculation of taxable income is difficult because the Indian law is to be applied on the income received in a foreign country. Calculation of taxable perquisites availed abroad may also present practical difficulties.

Existing provisions do not provide for a situation where a foreign employee may be forced to keep a household both in India and in his home country.

They also do not take into account some extra expenditure which is necessarily incurred by a foreigner in India like travelling to home country on leave, expenses on overseas communication, education of children, etc.

The time limit for completion of tax assessments of expatriates should be also be curtailed. Separate appellate tribunals should be formed to ensure quick disposal of tax disputes. In fact, there is also a need for an efficient settlement machinery where disputes could be resolved without any need to refer the matter to the courts.

A hassle-free tax regime for expatriate employees will certainly prove to be an effective tool to attract foreign investment in India.

agar@nda.vsnl.net.in