Taxability of Salary of RNOR for services rendered FROM Indi

 As per section 5, 1st proviso to section 1, the income of NOR , shall be included from a business or profession set up in India. In this case, he is a salaried employee. Hence, the services are rendered outside india and not taxable in India. But he should have documentary evidence to prove that services are utilised in USA.

 as per section 5, 1st proviso to section 1, the income of NOR , shall be included from a business or profession set up in India. In this case, he is a salaried employee. Hence, the services are rendered outside india and not taxable in India. But he should have documentary evidence to prove that services are utilised in USA.

 I agree as to inapplicability of Sec 5(1) since there is no business of employer set up in India. But question is of sec 9(ii) & explanation. My question is CAN Revenue take a view that  in this case of salary income, the service is rendered IN India (as distinct from service rendered FROM India) and treats it as income deemed to have accrued in India u/s 5(2)(b). In that case what is the defense or supportive case law or precedent if any.

 the assesee has to prove that services are not rendered in India . Physical presence will not matter. He has to prove that services are rendered only OUTSIDE INDIA. For this, email correspondence, agreements/contracts, printouts etc.are necessary. Consumption of service is important. Rendered means the receipient also should receive the service in India.

 Thanks Mr.Sudarshan.  I also am inclined to this view that as per the fact it is not taxable in India.Anyone any other view or angle to this?

Mr. Nitin, I am in exactly the same boat and would appreciate your answer/research into this. I am returning to India after 10 years and am fairly certain I would qualify as NROR for the next couple of years. I will continue to work for a US company as an Independent consultant from India and get paid in US dollars. This company has no partners nor customers who could avail the work I do and all of its use is in US and Europe.

A) If I get paid x amount of dollars per month and if it gets deposited in a US account and I transfer it to my NRE account, would that be taxable?

B) If you are inclined towards this situation being 'non-taxable', would I have to pay taxes to US government?

I would be surprised if I owe no taxes for the next couple of years to either country. :-)

 Mr. Reddy

I have found little supporting material/precedent on my queries. Perhaps it is so obvious. Anyway I am more inclined that in the situation described by me and you, till you become Ordinary Resident after 2 years or so (tests of residence), you need not pay any tax on any incme earned/paid outside india. Transfer of funds, out of income received outside India is not income and  hence not taxable in India. As Mr. Sudershan said in reply to my query, evidence that services were not rendered/used/received by employer/retainer IN India has to be established by the person claiming such income as non taxable.

To answer your questions,

(A) No. Transfer of your own funds into India in any account is not taxable as it is transfer and NOT income.

(B) Yes. If you are paid by a US retainer company IN US and if they receive/use your services/work IN US then it is taxable in US. Your retainer will be deducting tax from payments of your fees and pay it to IRS. You also need to file a Tax Return in US if you want to claim your work related costs, including travelling from consultancy income earned and claim refund of part of tax paid.

Also, once you become ordinary resident in India and your global income becomes taxable in India, you will get credit of income tax paid in US on producing a proof and attaching the same with your tax return here in India. As per my calculations, if your income from fees is about US$ 150,000 net tax you need to pay in India is about Rs. 4.00 lacs to Rs. 6.00 lacs depending upon tax paid in US. Social Security , State tax etc are not allowed to be deducted from tax payable in India. Only Income tax to IRS is reduced from tax on Income in India.

Further most likely as per the tax proposal under direct tax code yet to be approved by Parliament in India, the tax on higher income persons i.e. person having income above Rs. 10 lacs per annum, the tax is being reduced and on income above Rs. 25 lacs only 30% tax will have to be paid which presently is paid on Income above Rs. 5 lacs only.SO the net tax payable in India after becoming ordinery resident with global income taxable in India, net tax may not be there over and above what is paid in US.

Lastly, if possible, you can compare taxes in Europe (where your services will be used by your employer) and in US and arrange with them to pay your fees and deduct taxes in country with lowest tax rates or it can be part in US & part in Europe. This may save you some tax. If they have offices in say Luxembourg, no tax is to be paid there. You being a consultant and the tax not being given from their pocket, your employer may agree.

to answer your

Thanks much for your conversation.

Take care friends. A single employee resident in India is deemed to be PE of the non resident or foreigner. Even if you prove that non-resident has no income taxable in India, you still have to comply with other provisions of the Income Tax Act for which the department has fixed responsibility on the PE. One of them is TDS on payment of salary or commission or professional fees in India. You will have to comply with TDS procedures on any payment remitted to you in India.

Sunil -- Could you explain it a bit further? What is PE? From what I understand, since the work is being done in India, the entity that is employing me feels that there is no need to do tax deduction at source (TDS?). If they simply cut a check, it is my responsibility to choose the appropriate place to remit taxes. Given your explanation, what would I pay for? The total remittance amount or is there a structure to determine what the professional fees in India are? Also, does this all apply when one is on NROR status? I do not have any other income in India, if I do, I would certainly declare it.

 Mr. Reddy,

A.(1) Transfer of funds in not an income at any time. Not only in initial 1-2 years when the status is RNOR. The rationale being it is a transfer of your own funds and tax is on income at the time of its accrual (entitlement) / receipt. 

(2) The residential status can be seen from the links : https://law.incometaxindia.gov.in/TaxmannDit/Displaypage/dpage1.aspx?md=2&typ=cn&yr=2009&chp=6 (pl click on section 6 Residence in India) OR https://www.nritaxservices.com/who_nri_fema.htm (See below status under FEMA(Foreign Exchange Management Act) at the end). Please note that fulfilling ANY ONE of the two conditions u/s 6(6) will keep a person as RNOR (both conditions need not be met) There are several other sites also.

B. (i) Residential status is determined under 2 different laws in most of the countries. One under immigration/Foreign Exchange related laws and another under Taxation Laws. Both are not related directly and independent. Pl refer to the link above (nritaxservices.com.....).  A Resident under Taxation Laws (though under a temporary visa) is taxed for his income there, as you were taxed in US.

(ii) If you operate as a business (non individual i.e. as a partnership/company) out of (from) India and bill to your client in US, you will be taxed in India from day 1 as in that case your business entity (-as distinct from you as a person - has a separate tax status) has a place of business in India and irrespective of residential status it will be taxed in India. If you bill your client as an Individual consultant (may have trade/firm name but ownership by you only/proprietary firm) then same personal RNOR rules applies and foreign income is not taxable in India (as is the topic of discussion in this thread) till you are RNOR

(iii) Benefit of Double Taxation Agreement - DTA  between US & India is available in all the 3 scenario (a) You as employee of US Co. & working from India (b) you as an entity/business in India exporting your services and (c) you as consultant providing consultancy to US based client. However type and manner claiming relief from dual taxation will be somewhat different. Simplest is (a) then (c) and then (b). Because under (a) & (c), for initial 2 years, while you are RNOR, there is no tax in India.

(iv)You have to calculate tax on your NET Income in US and in India, - under 3 scenarios as above -  after taking DTA benefits into account and compare them to find out which is beneficial.  paying tax in India or US for initial 2 years and in long term. If you bill your client then expenses including travelling etc for the purpose of your business are allowed as business expenditure and your income is reduced by that before calculating tax in either country.

Sorry for my lengthy answers but the subject is such and has to have clarity.

 Sunil,

PE (Point of Establisbment/Permanent Establishment) is not relevant in case of Mr. Reddy till he is RNOR, IF his activity is limited to providing services FROM INDIA to a place OUTSIDE INDIA. However any activity aimed at furthering interest of the US company IN India will constitute him a PE for the US Company. Thus there is no liability on his client company in US under Indian Tax Laws - to deduct tax from payments made to him. This is a clear law. Mr. Reddy is an independent consultant but even if he is an employee of US Co., He will NOT be a PE in India of US Co. All Supreme Court/High Court Judgements are clear that liability for TDS from payments to employee/contractor/consultant etc in India is there ONLY IF the services are rendered IN India and is deemed to have been received/utilised in India.   

This is not fact of the case described by me or Mr. Reddy (as he has described). ANY change in activity to relate, start, provide business/services IN India will attract liability of Tax deduction at source on paying company.

Thanks so much. That does clarify quite a bit. You guys are awesome.

 2nd file attached