Applicability of TDS provisions in case of expat

Income earned by expatriate employees abroad is taxable in India….!

In a landmark ruling of the Supreme Court confirming that Domestic companies must deduct tax at source on salaries paid to their expatriate staff and if tax can be levied on these employees on wages given abroad by foreign joint venture partners of the Indian firms. Further, in case the expatriates are seconded to work for the India subsidiary/ joint venture, then Indian subsidiary/ joint venture should deduct tax on entire salary i.e. salary paid in India and overseas.

Supreme Court in case of Commissioner of Income-tax, New Delhi vs. M/s Eli Lilly & Company (India) Pvt. Ltd [Civil Appeal No. 5114 / 2007 – Supreme Court] confirms liability to deduct tax on offshore salary paid to non-resident employees for services rendered in India.

The I-T department has contended that the job offer to the employees through the JV Board indicated that only a part of their gross salary was paid by the assessee in India and the major part was paid by the foreign partner outside India despite employees not performing any work outside the country.

It was also found that the JV was deducting TDS only from the part of the salary paid in India, it said. The income tax department while partly allowing the appeal of the company had held that the income earned by expatriate employees abroad was taxable in India.

However, it had ruled that no tax can be demanded from Eli Lilly & Company as the expatriate employers had paid advance tax on the total income, including the salary received abroad, earned by them.

The Supreme Court further decides:

• Where the home salary paid to the expatriates has any connection or nexus with his rendition of service in India, then such payment would constitute income which is deemed to accrue or arise to the expatriate in India in terms of section 9(1)(ii) of the Act. Section 9 is not only a machinery section but also provides chargeability of tax on incomes which are deemed to accrue or arise in India.

• If the services of employment are rendered in India, the place of receipt or actual accrual of salary is immaterial. Section 192(1) of the Act has to be read with section 9(1)(ii) of the Act.

• Where the home salary is paid and it is found that no services have been performed outside India, such payment shall be “deemed to accrue or arise in India” and the Indian subsidiary/JV is statutorily obliged to deduct tax under section 192(1) of the Act.

Overseas Assets Disclosure Not Applicable to NOR

According to 3rd Proviso to Section 139 of the I. T. Act has been introduced with effect from 01/04/2012 the requirement for submitting the details of Overseas Assets are restricted to Resident and Ordinarily Resident (R & OR) it is not applicable to Not Ordinarily Resident in India (NOR).

Extract of proviso to Section 139[(1) is given below for reference:

9a[Provided also that a person, being a resident other than not ordinarily resident in India within the meaning of clause (6) of section 6, who is not required to furnish a return under this sub-section and who during the previous year has any asset (including any financial interest in any entity) located outside India or signing authority in any account located outside India, shall furnish, on or before the due date, a return in respect of his income or loss for the previous year in such form and verified in such manner and setting forth such other particulars as may be prescribed :

Residential Status – Section 6 of Income Tax Act

Residence in India.

546. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

(b) 55[* * *]

(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

56[Explanation.—In the case of an individual,—

(a) being a citizen of India, who leaves India in any previous year 57[as a member of the crew of an 58Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and 59[eighty-two] days” had been substituted.]

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management60 of its affairs60 is situated wholly60 outside India.

(3) A company is said to be resident in India in any previous year, if—

(i) it is an Indian company ; or

(ii) during that year, the control and management60 of its affairs60 is situated wholly60 in India.

(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

61[(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.]

Resident but not ordinarily resident

To determine category – resident or non-resident or Residents but not ordinary, you may apply the following tests:

Resident

A Resident is one who falls into either of these two categories:
Is in India for 182 days in the year or more, OR
In the preceding four years was in India for 365 days or more, and in the current tax year is in India for a total of 60 days or more
This applies to citizens of any nationality. However the period of 60 days in the second clause above will be extended to 182 days for those who fall into one of these two categories:
an Indian citizen who left India in any year for employment outside India, OR
an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India
Non-Resident
A tax assessee is non-resident if he or she is not a Resident as-per the section above.

Resident but Not Ordinarily Resident
A Resident is “not Ordinarily Resident” if one fulfils either of these two conditions:
Has been a Non-Resident in India for 9 out of 10 preceding years, OR
During the 7 preceding years been in India for a total of 729 days or less

Foreign Income Taxed On Residential Status

Under the Income-Tax Act, 1961, the taxability of an individual is dependent on his residential status, which is determined on the basis of his physical presence (number of days) in India during the relevant financial year.

A resident individual is subject to tax on his global income in India subject to the foreign tax credit on taxes paid outside India. As such, income from foreign investments would generally be liable to tax in India. In case of non-residents, such an income is not liable to tax as long as it is not directly received in India.

Tax assessees may be resident or non-resident. Residents are further subdivided into two sub-categories – (a) resident and ordinarily resident, and (b) resident but not ordinarily resident. To determine which category you fall into, apply the following tests to the tax year from April 1 to March 31.

Resident

A Resident is one who falls into either of these two categories:
Is in India for 182 days in the year or more, OR
In the preceding four years was in India for 365 days or more, and in the current tax year is in India for a total of 60 days or more
This applies to citizens of any nationality. However the period of 60 days in the second clause above will be extended to 182 days for those who fall into one of these two categories:

an Indian citizen who left India in any year for employment outside India, OR
an Indian citizen or a foreign citizen of Indian origin (NRI), who is outside India, comes on a visit to India

Non-Resident

A tax assessee is non-resident if he or she is not a Resident as-per the section above.

Resident but Not Ordinarily Resident

A Resident is “not Ordinarily Resident” if he or she fulfils either of these two conditions:

Has been a Non-Resident in India for 9 out of 10 preceding years, OR
During the 7 preceding years been in India for a total of 729 days or less

New rules require disclosure of foreign assets

With increased global mobility, India has a large number of foreign nationals / Persons of Indian origin working in India. India has a large foreign student community as well. Given that these individuals/their accompanying spouses could have assets overseas, a reporting requirement will be triggered where these individuals are considered “resident in India”.

Accordingly, a foreign national / his or her spouse / a student having overseas bank account or investments would be covered under this reporting requirement if their presence in India exceeds 182 days even in the first year of arrival to India.

The Central Board of Direct Taxes (CBDT) recently notified the new tax return forms for the tax year 2011-12 or assessment year 2012-13, mandating disclosure of foreign assets. In the tax return forms called ITR 2/3, a new section called ‘FA’ (Foreign Assets) has been introduced to disclose foreign assets.

As per the notification, individuals having taxable income exceeding Rs.1 million (nearly $20,000) and domestic and expatriate resident individuals with assets located overseas have to file their returns through the electronic mode.

Resident individuals are required to file tax returns in India irrespective of whether they have income chargeable to tax in India or not.

As per the Finance Bill 2012, resident individuals having assets, including financial interest in any entity located outside India are required to furnish tax returns electronically from financial year 2011-12 onwards giving complete details of such assets.

In other words, income is not the only criteria to file an income tax return in India now. Those resident individuals who have assets outside the country are compulsorily required to file income tax return, irrespective of whether they have any income generated in India or not.

Totalization Agreement with Japan

Employees sent from Japan to India as well as those sent from India to Japan are currently obliged to affiliate to the social security systems of both countries thus causing duplicable payments of social security contribution which impose a huge economic burden on both individuals and corporations. It is expected that the conclusion of an agreement between Japan and India on social security will solve these problems through reducing the burden imposed on the employees and corporations, and further promote human and economic exchanges between the two countries.

Japan and India signed the Comprehensive Economic Partnership Agreement (CEPA) on 16th February 2011 in Tokyo. After the completion of the respective necessary legal procedures, the Agreement entered into force on 1st August 2011.

Under CEPA, Japan and India also agreed to enter into negotiations on a Social Security Agreement in order to complete the consultations and negotiations within 36 months after the commencement of the consultations, which took place in January 2011. The first round of negotiations was held last week between 25 -29 July in Tokyo which contributed significantly towards the conclusion of the negotiation.

The first meeting of the Joint Committee established under the Agreement was held on 1st August 2011 in Delhi. At this meeting, co-chaired by Ambassador Akitaka Saiki (Japanese side) and Dr. Rahul Khullar, Commerce Secretary (Indian side), the Joint Committee made the decisions necessary for the implementation of the Agreement, such as the Operational Procedures. It is expected that this Agreement will promote the liberalization and facilitation of trade as well as investment between the two countries and will further strengthen their economic ties in wide-ranging fields.

India, Japan reach agreement on social security contributions

India, Japan reach agreement on social security contributions
India and Japan have reached an agreement to streamline social security contributions aiming to further promote human and economic exchanges between the two countries.

The governments of Japan and India have reached a substantial agreement on social security, as a result of its Fourth Round of inter-governmental negotiations which was been held from 28 May in Tokyo, a Japanese Embassy statement said here.

As per the present agreement, Japanese and Indian employees are required pay the social security contribution in both the countries, imposing a huge economic burden on individuals and their corporations.

“It is expected that after its conclusion, the agreement will solve these problems through reducing the burden imposed on the employees and corporations, and further promote human and economic exchanges between the two countries,” the statement said.