TAX PLANNING FOR EXPATRIATES:
The term ‘Expatriate’ is an undefined word in the Income tax act 1961. However, Non residents will become exigible to Income tax on any income accruing or arising or received in India. Expatriates are of three types 1) Those coming to India for employment 2) Foreign technicians and 3) Seconded Employees. Though the DTAA (Double Taxation Avoidance Agreement) will talk about availing tax credit in the home country, the very thought of additional paper work on claims gives the feeling that it is better to get the exemption in the other country.
Just to epitomize a few developments/points that have a bearing on tax planning for expatriates are as below,
- The PF department has very recently issued a Notification under EPF Act 1952, mandating PF deduction for International workers. Unlike for Indian staffs, where the PF deduction is a maximum of Rs.780 (i.e. 6500*12%, where the basic pay ceiling is only Rs.6500), the amount to be deducted for expatriate staffs is without any such limit. Moreover it seems the rate has to be calculated on the entire Gross pay. This means that there is an effortless deduction available under Sec.80c for a maximum of Rs.100000/- on account of EPF.
- The Supreme Court in Eli Lilly case had ruled that the Indian company has to do TDS even on the salary paid by the Home country for the seconded employees. Unfortunately there are no India tax rate ceilings on Salaries and wages in any DTAA unlike fees for technical services, royalty or Dividend etc. This would mean that MNCs will have to seriously consider not deputing persons for non-significant positions such as liaising or reporting to Head office after reading the situation.
- Many DTAA exempt the remuneration paid to expatriates subject to the condition that the period of stay of equal or less than 183 days and the remuneration is paid by the non resident employer or not the PE in India of such non resident. Though the Supreme Court has ruled as above, DTAA will prevail to the extent mentioned therein. So the expatriates should take care to get an Employment visa for not more than 6 months and get it subsequently extended, provided the project is not too lengthy.
- The AAR had earlier ruled in 2004 in Hindustan Power plus case that living allowances or expenses and other benefits such as Car Provision given to seconded Technicians, (where the main remuneration comes from the non resident) are exempted from tax. Thus if the Indian employer wants to pay, it can reimburse the living expenses and other expenses to the extent actually incurred to keep fingers crossed. Again, this is appropriate in cases which are compliant with the criteria for exemption as in the respective DTAA.
- In fact, almost many DTAA do not mention any thing about Independent contractors. There is a common clause on Independent personal services which only says that subject to there being no fixed base in the other contracting state; the income will be taxable only in the resident state. The term Fixed base may be construed in line with the definition of PE in the DTAA. This in conjunction with another simple clause on ‘Other Income’ (where those incomes not covered by the DTAA are taxable in the resident state) would mean that the payment received by Independent contractor is not taxable in India. So, the agreement can be made with the Expatriate in the individual names as ‘Contract for Service’ rather than a secondment agreement between two companies. The expatriates can actually come on a sabbatical leave to India. But of course, the number of persons should be very less and it should not happen on regular basis so as to invite controversy over ‘fixed base’.
These apart there are already other deductions available under Chapter VIA which apply equally to Expatriates