Hiring expatriates to turn costlier

The Finance Minister’s Union Budget 2020 contains proposals that will benefit expatriates working in India. The most notable one is the change in tax residency provisions. Expatriates will now be able to stay longer in India before taxation of their global income gets triggered.

Prior to this proposed change, they were able to stay in India only for twothree years before global taxation was triggered, but now they can stay up to four-five years. The new optional concessional tax regime will also favour expatriates as most of them generally do not claim deductions or exemptions. The only deductions they take are under Section

80C towards Provident Fund contribution and/or tuition fees of their children.

Another proposal is to tax the employer ’s contribution towards Provident fund, National Pension Scheme and Superannuation Funds, exceeding ~7,50,000. Even the interest on such excess contribution will be taxable in a manner to be prescribed. The stated objective is to tax highly-paid employees, who by structuring their compensation package, park their funds in these retirement schemes and save taxes.

Expatriates, particularly the highly-paid ones, will be hit by this. Rather, the burden will fall on the Indian companies that hire them. Generally, such employees are tax equalised and employers bear their tax liability in India.

For expatriate employees who qualify as international workers, employers are required to mandatorily contribute to the Indian Provident Fund at the rate of 12 per cent of their salary under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952(PF regulations). The salary here is high as expatriate employees do not have structured packages. Almost the entire salary (except performance bonus and benefits) comes under the ambit of PF. Even the salary cap of ~15,000 per month is not applicable to them. On the one hand, there is the legal obligation to contribute to PF under the PF regulations and on the other, they will be required to pay tax on contributions beyond ~7,50,000 under the Income-tax Act, 1961 by virtue of this proposed change.

Even where employers want to reduce their contribution to bring it down below ~7,50,000, they cannot do so as it would be a violation of PF regulation. The government should reconsider this tax proposal, especially for expatriate employees. They are not putting in more money out of choice but to comply with PF regulations.

This proposal will hinder Indian industry from hiring the requisite talent and special skill sets that may be important, particularly for the manufacturing sector. It won’t affect companies that have expatriates on secondment from countries with which India has a totalisation agreement (SSA countries). They generally continue to contribute to their home country’s social security instead of Indian provident Fund. But corporates hiring expatriates directly on their payroll or expatriates from non-ssa countries will get impacted adversely. One hopes the government will reconsider this proposal to protect the interests of industry.

Expatriates invest a high amount to comply with PF regulations. The government should consider exempting them from the ~7.5 lakh limit