Tax status of expatriate employees

EXPERT EYE

Determination of residential status is necessary to ascertain the tax liability of expatriates arising out of their income in India and outside India.

If the tax status is that of a "non-resident" or "not ordinarily resident", then only Indian income is liable to tax in India, there being no tax on foreign income in India. But in case of a "resident", his entire world income is taxed in India whether or not the same accrues or arises in India or outside India.

The above legal position creates practical difficulties for expatriate employees, particularly those who are posted in India for short and irregular durations. Their salary may be paid by the foreign companies or by the Indian counterparts or by both. Further, the salaries and other facilities may be paid/provided partly in the foreign country and partly in India.

To overcome the aforesaid difficulty, the tax treaties usually contain a specific provision saying that such income should normally be taxed in the employees' country of residence, but the same may become taxable in India if the employee stays in India for more than 183 days in a fiscal year.

However, in order to claim exemption in India, following conditions should be satisfied:-

Total duration of employee's stay (in aggregate) in India does not exceed 183 days in a tax year (April 1 to March 31).

The remuneration for services rendered by the employee is paid by, or on behalf of, an employer who is not a resident of India; and

The remuneration is not borne by a permanent establishment or a fixed base which the employer has in India.

Whereas there is no difficulty in interpreting conditions specified in para (i) and (ii) above, the interpretation of (iii) is not so easy because the words "borne by permanent establishment" are not explained in any of the tax treaties.

As far as taxation of foreign income (income which accrues or arises outside India) is concerned, so long as expatriate employee's status remains that of a "'non-resident" or "not ordinarily resident", he will not be liable to pay any tax India but as soon as he becomes a "resident", he is liable to pay tax in India on foreign income also.

Under the provisions of I.T. Act that prevailed up to A.Y. 2003-04, an expatriate employee, under normal circumstances, enjoyed the status of "non-resident" prior to taking-up Indian assignment or in the first year of stay in India and that of a "not ordinarily resident" for nine years after he ceased to be a "non-resident".

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

The amendment made in 2003 needs to be withdrawn because this will certainly discourage expatriate employees to take up Indian assignments for a more than two years which does not help the industry or services where expatriates are engaged.

Tax structure relating to foreign employees continues to be complicated. In fact, foreign employees are like ambassadors of their companies in India and should be treated with utmost care and consideration.

When they feel trapped in the maze of tax laws here, a negative message goes out, which certainly creates an anti-investment climate for India.

H.P.AGRAWALAGAR@BOL.NET.IN