Taxability of Expatriate Salary

Taxability of Expatriate Salary:

Salary paid to Expats deputed in India engaged by an employer of the other Contracting State is taxable in India and the primary liability to pay tax vests with those expatriate employees working in India. Certain relaxation is provided in the relevant Articles under the head “Dependent Personal Services” wherein the tax liability arises only when the expatriate employee stays in India for not less than 183 days during the previous year.

TDS on Expatriate Salary:

The Indian Income Tax Act casts a responsibility on the employer of expats irrespective of its residential status to deduct tax at source on the salary paid for expats working in India.

Foreign companies operating in India must deduct TDS (tax deducted at source) even on salaries paid abroad to their expatriate employees for services rendered in India, the Supreme Court has ruled.

Where salary is payable in foreign currency, the amount of tax deducted is to be calculated after converting the salary payable into Indian currency at the telegraphic transfer buying rate as adopted by State Bank of India on the date of deduction of tax (Rule 26) read with Section 192(6).

However, the liability of deducting tax at source is in the nature of vicarious liability, which pre-supposes existence of primary liability. The said liability is a vicarious liability and the principal liability is on the person who is taxable.

Engagement of OSS Vendors whether Indian Companies liable for TDS:

When a company in India engages services of OSS Vendor and the OSS vendor deploys its own Support Staff in India they are treated as expatriate/ expats. The responsibility to deduct tax for salary payments to expats is the responsibility of the OSS vendor.

The Indian Company has no responsibility to deduct tax on salary payments made to the expats of the OSS vendor. Further there is no binding contract between the Indian Company and the expats, no payments were made directly by the Indian Company to the expats, hence the Indian Company cannot deduct TDS for the salary payments made by the OSS vendors to the expats engaged by them.

Author

N P Mathi Lingan & Associates

Chartered Accountants

E-mail: auditorshelp @ gmail.com

Great detailed explanation by CA NP Mathi Lingan on Taxability and TDS on Expatriate Salary! Here’s a quick summary and key takeaways for clarity:

1. Taxability of Expatriate Salary in India:

Salary paid to expatriates deputed to India by employers from other countries is taxable in India.
Tax liability arises only if the expatriate stays in India for 183 days or more in the previous year (as per Double Taxation Avoidance Agreement - DTAA, under “Dependent Personal Services”).
The primary liability to pay tax lies with the expatriate employee.

2. TDS (Tax Deducted at Source) on Expatriate Salary:

Indian Income Tax law mandates the employer (whether resident or foreign) to deduct TDS on salary paid to expatriates for services rendered in India.
Even foreign companies operating in India must deduct TDS on salaries paid abroad to expatriate employees for Indian services (as upheld by the Supreme Court).
For salary paid in foreign currency, TDS is computed by converting the salary to INR using State Bank of India’s telegraphic transfer buying rate on the date of deduction (Rule 26 + Section 192(6)).
The employer’s TDS liability is vicarious; the primary tax liability remains on the employee.

3. Regarding OSS Vendors and Expatriate Staff:

If an Indian company hires services from an OSS (Offshore Support Services) Vendor and the OSS vendor deploys its own expatriate staff in India:
- The expatriates are considered expats of the OSS vendor.
- The OSS vendor is responsible for deducting TDS on salary paid to these expats.
- The Indian company has no TDS deduction responsibility on salary paid by OSS vendor to its expats since:
  - There’s no direct payment from the Indian company to the expats.
  - No contractual relationship exists between the Indian company and the expats.

Summary Table:

Scenario	TDS Responsibility	Tax Liability
Expat salary paid by foreign company in India	Employer (foreign company)	Expatriate employee
Salary paid abroad for Indian services	Foreign company must deduct TDS	Expatriate employee
OSS vendor’s expats deployed in India	OSS vendor deducts TDS on their expats’ salary	OSS vendor & expats
Indian company hiring OSS vendor services	Indian company has no TDS liability on expat salary	OSS vendor & expats