Salary of employees deputed abroad not taxable in India

Individuals deputed abroad and taxed in another country would no longer be subject to double taxation. Last week, the Authority for Advance Ruling (AAR) said individuals who are nonresidents according to the Income-tax Act (I-T Act) don’t need to pay tax on salary received in India. The ruling provides relief to employees deputed abroad and who receive a salary there as well as in India.

Double taxation of salary has been controversial due to conflicting laws. “Section 9 of the I-T Act says an individual who earns income in India or deemed to have earned income in the country needs to pay tax on it. At the same time, the laws dealing with tax treaties with other countries say the income will only be taxed in the country where the services are rendered,” says Naveen Wadhwa, general manager, Taxmann.com.

He says there have been Supreme Court (SC) rulings that an individual can either choose to pay tax based on domestic laws or regulations covered under the tax treaties --- whichever of the two that benefit him the most. If he or she decides to pay taxes according to the treaty provisions, domestic laws will not apply. Despite this, tax authorities continued to tax Indian income of nonresidents.

Many employers deduct tax at source of employees deputed abroad when paying salary in India. Such employees had to later claim a credit from Indian tax authorities, as they had already paid the tax abroad. The US taxes the global income of individuals who have become residents there (stayed there for 183 days), according to its laws.

Double taxation resulted in extra paperwork and cash flow problems. By the ruling, employers don’t need to deduct tax any more. Going by the AAR decision, the ruling is not only applicable to countries with which Indian government has signed tax treaties but also in cases where there’s no tax treaty, or where the employee doesn’t need specific conditions under the treaty. But, the AAR is a quasi-judicial body, which does not set a precedent like a tribunal or court does. The ruling only has persuasive value; its decisions are considered by the tax department.

Typically, when an Indian company sends an employee abroad for an assignment, he receives salary abroad and in India. The employee is transferred on the payroll of the company abroad that pays him a basic salary and allowances, and claims a deduction for it. The Indian employer also deposits a portion of the salary in an Indian bank account so that the employee can manage his equated monthly instalments and household expenses here. “The mere fact that an Indian company is giving some amount to its employee shouldn’t be subject to tax. The taxability needs to be looked at only by determining the residence status of an individual,” says Abhishek Rastogi, partner, Khaitan & Co.

The I-T laws stipulate when an individual may be considered as a resident or non-resident, depending

on the number of days the person has lived in the country. To qualify as a resident Indian in financial year 201819, for example, an individual should spend at least 182 days in the country between April 1, 2018, and March 31, 2019. Also, if a person spends at least 365 days during the four years preceding the financial year and 60 days in 2018-19, he would be considered a resident. If these conditions are not met, the individual is classified as non-resident. The global income of residents, irrespective of where it is earned, is taxed in India.