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Tax Regime In India for Expatriates with
an overview of a change in Economy
Topics to be covered……
India Briefing… Overview of recent trends in the
Indian economy
The Tax Regime in India Overview of tax issues specific to
inbound expatriates and outbound assignees
Solutions to Reduce Tax Costs
India today is fast changing – setting the pace for growth and stability…
Hindu rate of growthHindu rate of growth BureaucraticBureaucratic Protected and slowProtected and slow Small consumer marketsSmall consumer markets Underdeveloped Underdeveloped
infrastructureinfrastructure
One of the fastest growing economiesOne of the fastest growing economies Reasonably proactiveReasonably proactive Opening up and dynamic economyOpening up and dynamic economy Booming and promising consumer marketsBooming and promising consumer markets Some of the world’s largest infrastructure Some of the world’s largest infrastructure
creationcreation
Yesterday…
…and today
0
2
4
6
8
10
12
1984
-85
1985
-86
1986
-87
1987
-88
1988
-89
1989
-90
1990
-91
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04*
GDP Growth
Growing GDP 11
17.9 18.522.2
26.331.8 33.5 35 33.2
36.8
44.6 43.8
52.7
63.5
19.421.9 23.3
28.7
36.7 39.1 41.5 42.4
49.7 50.5 51.4
61.4
77
0
10
20
30
40
50
60
70
80
90
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04*
Exports Imports
Falling Inflation 22
0
2
4
6
8
10
12
14
1997
-98
1998
-99
1999
-00
2000
-01
2001
-02
2002
-03
2003
-04
WPI CPI
Increasing International Trade
33
USD bn
At 19993-94 prices at factor cost
Source: KPMG analysis, Tata Statistical Outline 2005, Indiastat
Indicators of a growing and stable economy
5.82.2
6.415.1
20.817
22.325.9
29.535.1
39.5
51
71.8
107.5
129.7
0
20
40
60
80
100
120
140
ForeginExchangeReserves
0
2000
4000
6000
8000
10000
12000
FDI Approvals
FDI Inflows
…
Strong Forex Reserves 44
Increased Foreign Direct Investment
55
Understanding the drivers for growth.. Economic Growth Averages, Real GDP
Source: IMF World Economic Outlook Database
1998 to 2004
World Growth: 2.7%
The drivers of India's Economic Growth
Increased liberalization of sectorsIncreased liberalization of sectorsOpenness to foreign direct investment and Openness to foreign direct investment and
movement to an open competition policymovement to an open competition policyContinued agenda of reformContinued agenda of reformDevelopment of transport and logistics Development of transport and logistics
infrastructureinfrastructureGrowth of the services sectorGrowth of the services sectorRegulatory reform and creation of an enabling Regulatory reform and creation of an enabling
frameworkframeworkTax structure reformTax structure reformGrowth of the Indian consuming and rich classGrowth of the Indian consuming and rich class Increased willingness to spend and consumerismIncreased willingness to spend and consumerism
Implication on human resources
Strong Demand for skilled labor-Industries like Information Technology (IT) & IT enabled Services (ITES) likely to beat estimates
India viewed as an off shoring/outsourcing destination of the world
Entry of Multinational Corporations (MNCs) intensifying competition and changing Human Resource Management (HRM) practices
Increasing literacy rates / individuals opting for higher/specialized education
Change in demographics-An upward movement of income classes
Changes in overall wants and needs, motivators for work, and consumer behavior
Job motivation-Challenge, excitement and not job security as drivers
Increase in the number of youth employed in frontline jobs
Average age at which a person starts drawing a paycheck reduced
The Cost Advantage……………The Cost Advantage……………
India offers a significant cost advantage: a major reason for India today to be looked as a major outsourcing hub.
India’s minimum wage is approximately 20 percent lower than China, and up to 50 percent less than in Thailand – these variances differ according to the regions which are being compared.
Salaries and wages as % of total labour costs
Average labor costs amongst directly employed regular workers (All-India)
Compensation structuring options
Traditional model : Fixed Basic Salary, Allowances And Perquisites
Companies are moving towards the CTC model with part of the package being flexible.
- Employees can be given the option of choosing from a basket of options such as HRA, Transport, Company Car, Leave Travel Allowance (LTA), Medical Reimbursements, etc.
CTC however, does not involve bonus and incentives, that is performance based
With the introduction of FBT, there is further scope for tax efficient compensation structuring
Tax Regime vis-à-vis expatriates and assignees
Domestic tax law of host country
Double Taxation Avoidance Agreement [s]
Domestic tax law in India
Other regulatory issues-exchange control
and entry registration
Residential status
Residential status
Resident & Ordinarily resident
(ROR)
Resident
Resident but Not Ordinarily resident
(NOR)
Nonresident(NR)
Residency in India is determined by physical number of days stay in India ( > 182 Days)
Broadly expatriates coming to India would become taxable on worldwide income from the 3rd or 4th financial year after arrival in
India
None of None of the the
conditions conditions satisfiedsatisfied
Any one Any one of the two of the two conditions conditions satisfiedsatisfied
Non - ResidentResident
Basic ConditionsBasic Conditions
(a) 182 days or more in a financial year
(b) 60 days or more in a financial year plus 365 days or more in four financial years preceding the relevant financial year
Note: day of arrival and departure to be counted as full day presenceNote: day of arrival and departure to be counted as full day presence
(a) Additional Conditions
(b) Nonresident in India in nine out of ten financial years preceding the relevant financial year
(c) Present in India for 729 days or less during the seven financial years preceding the relevant financial year
One or One or both the both the
conditions conditions satisfiedsatisfied
None of None of the the
conditions conditions satisfiedsatisfied
NORROR
Law from 1 April 2003
Incidence of tax
Resident & Ordinarily Resident (ROR)
Nonresident (NR) and Not Ordinarily Resident (NOR)
Income sourced from India
Income received/ deemed to be received in India
Worldwide Income
Income liable to tax in IndiaResidential Status
Broadly, NOR/NR not taxable in India on foreign sourced income
EXPATRIATES………?????
An expatriate (in abbreviated form, expat) is a person temporarily or permanently residing in a country and culture other than that of the person's upbringing or legal residence.
Compensation and benefits offered to inbound expatriates
Base salary Bonus (performance based and completion bonus) Expatriate premiums
- Hardship payments- COLA-Cost of Living Allowance
Benefits- Home leave- Housing (employer provided or cash rental
allowance)- Rest and recreation- Tax assistance and equalisation- Company car/driver- Relocation assistance- Medical insurance- ESOP- Education assistance
Non-taxable/concessional taxation items for expatriates in India (some examples)
Workdays outside India for NOR/NRs
Housing benefit /allowance
Reimbursement of relocation expenses
Tax on non-monetary benefits
(but not claimed as corporate deduction)
Overseas contributions to social security /medical insurance schemes
(to the extent not immediately vested)
ESOP under qualified plan
(…….But subject to FBT) Club expenses Motor car expenses Telephone expenses
Foreign Nationals working On foreign ships For foreign government For approved foreign aid projects(subject to conditions)
Dual employment contracts
Meaning- An expatriate who
has dual/multinational duties signs a separate contract with the employer for services to be performed in each location
Advantage- Only in case of
NR/NOR (physical stay outside India a must)
- Remuneration for overseas workdays not taxable in India:such services
should preferably have no connection with the Indian assignment
DocumentationEmployment contracts with the same or two or more entities clearly stating roles and responsibilitiesSplit remuneration commensurate with services rendered for each entityTime records/working papers to demonstrate work done for respective entitiesPhysical stay details justifying services rendered outside India
Employee incentive schemes [ESOPS] Qualified Plan:
ESOP subject to tax only on ultimate sale of shares (provided the plan meets with jurisdictional regulatory requirements)
Non-Qualified Plan:
ESOP benefit taxable on vesting
Alternative argument – taxable on exercise
Capital gains on subsequent sale of shares
Employee Stock Option Scheme(ESOP)
Employee Stock Purchase Plan
(ESPP)
Share Appreciation Rights (SAR) /
Phantom Equity Plan (PEP)
Relief under domestic tax laws
Short-stay exemption
Foreign citizen Present for less than 90 days in India Salary is not cross-charged to Indian entity.
Tax Credits (only if there is no treaty)
‘ROR’ is liable to tax on world wide incomeProportionate foreign tax credits allowed against the Indian taxes on the doubly taxed income
Relief under double tax treatiesIndia has more than 65 Treaties with various countries
Exemption of employment income for tax residents of a treaty country
Work days outside India Even if salary RECEIVED in India Supported by decision of Authority of Advance Ruling
Short stay in IndiaPresence in India < 183 daysExpense not cross charged/borne by Indian Entity/PERemuneration to be paid by a foreign employer
Foreign tax credit on doubly taxed income
Short-stay exemption under DTAA(caution points)
Exemption will not apply if deduction is sought to be claimed from income on Indian Permanent Establishment
Specific provisions of each DTAA to be examined
Residency outside India as per the Treaty (including Tie Breaker on facts!!) may have to be substantiatedBenefits provided Benefits provided
in India by local in India by local entityentity
TaxableTaxable
Foreign Tax Credit under DTAA
Foreign Tax Credit
Available based on country of tax residence
Only if the same income is taxed in both home and host country
At the time of filing the individual tax return (no rules regarding credit at the time of withholding/advance tax) By submitting the proof of taxes paid in the country of source.
Withholding tax /compliance requirements under Indian tax laws
Tax to be withheld only at the time of payment of salary
Employer outside India is also required to withhold tax from the remuneration chargeable to tax in India
If the employee has two employers – employee may disclose all the income to one of them
Other statutory compliance requirements (annual/quarterly withholding tax returns)
Fringe Benefit Taxation (FBT) in India effective 1/4/2005
Computation of FBT @33.66 percent* on:
Discount on tickets for private journey Applicable only to transportation/airline companies
Employer contribution to approved superannuation fund
Specified percentage of deemed fringe benefits
FBT not tax deductible*(30%tax+10% surcharge+2% education cess)
Deemed fringe benefits(even where expenses not related to employees)
50 Percent of the following:
Festival
Gifts
Use of club facilities
Use of health club, sports, and similar facilities
Scholarships
Effective tax rate 16.83 percent of the expense
20 percent of the following:
Conveyance, tour and travel including foreign travel
Hotel, boarding and lodging Repair, running, maintenance, and
depreciation of motorcars Repair, running, maintenance, and
depreciation of aircrafts Entertainment expenses Hospitality expenses Employees’ welfare Sales promotion including publicity
(advertisements excluded) Guest house maintenance Conference Telephone
Effective tax rate 6.73 percent of the expense.
Industry specific rates prescribed
FBT on foreign companies
Nexus with India
•Employee based in India OR•Employee taxable in India OR•Expenses attributed to PE in India
No FBT on foreign companies if
•no employees based in India; OR •all employees exempt as per DTAA
FBT also applicable to companies exempt from Tax such as, Liaison office, Airlines/ Shipping Co.
FBT base: Industry specific ratesFBT base: Industry specific rates
Nature of industry Nature of expenditure Reduced presumptive base
Hotel Hospitality 5%
Carriage of passengers or goods by motor car.
Repair, running & maintenance of motor cars (including fuel and depreciation)
5%
Manufacture or production of Pharmaceuticals
software
Maintenance of Production Machinery
5%
Construction Raw Materials 5%
Carriage of passengers or goods by aircraft.
Repair, running & maintenance of aircraft (including fuel and depreciation)
Nil
Exchange regulationsPayment of salary for foreign nationals / Indian
citizens deputed to India -Upto 75 percent of salary can be paid outside India-Balance 25 percent has to be paid in India
Remittance
-During the assignment, expatriates can remit entire net salary after taxes provided:
Such remittance is for maintenance of close relatives abroad and The employment is for a specific duration (irrespective of the length) or for a specific job or assignment, the duration of which does not exceed three years
-If the expatriate’s assignment exceeds three years, he/she can still remit upto US$100,000 p.a for maintenance of close relatives abroad-On completion of assignment, expatriate can remit other assets upto US$1,000,000 per calendar year
Visa and registration with the Foreigners’ Regional Registration Officer (FRRO)Employment visa v. Business visa
Foreign nationals are required to get FRRO registration if visa/intention to stay exceeds 180 days
-Apply for extension of visa –within 15 days before expiry of visa
-Get registered with FRRO-within 14 days of arrival where visa is valid for more than 180 days
-Get registered with FRRO- within 14 days of crossing 180 days or expiry of visa whichever is earlier where intention to stay is for more than 180 days
Cumbersome process for rectification of defaults and extension of visa (especially business visa)
Corporate tax issues associated with deputation of expatriatesPermanent Establishment (PE) /
Business connection exposure
Transfer pricing issues
Withholding tax on cross-charge
Obligation to pay service tax
Tax issues specific to outbound assigneesTaxability in India depends on…
•Timing of transfer -Would ascertain the residential status in the year of departure/arrival
•Nature of the assignment-Whether employee proceeds abroad on employment/ tour/transfer
•Nature of payment-Whether allowances or reimbursement
•Place of payment-Income received in India is taxable in India (subject to treaty relief)
Obligations of employer and employeesWithholding tax on Salaries and
benefits
Withholding tax return filings
Individual tax return filings
IN HOMEIN HOME …and……and… HOSTHOST COUNTRIES
Note: Foreign employer also required to withhold India tax if Note: Foreign employer also required to withhold India tax if remuneration taxable in Indiaremuneration taxable in India
Solutions to reduce tax costs
Claim tax benefits under laws of home/host countries
• Tax on non monetary perquisites • Tax exemptions on per diems where possible• Qualified stock options• FBT planning
Treaty Benefits
• Salary taxable only where services rendered (even if received in India) .
• Short-stay exemption . • Appropriate tax credits claims and flow back of
such claims to the employer.• Introduce tax equalization/hypo tax policies.
Consider moving to NET PAY approach
Employees to be tax neutral
Employees freed from hassle of ensuring tax compliance
Tax optimization and compliance controlled and ensured by the employer
Up side of tax differentials flow back to the employer and reduce employee costs
THE END
ANKIT SETHI MOHAMED IMRAN TAJ
05A010 05A070III Bcom A III Bcom A
Efforts by,
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