Taxation of Expatriate Employees in India

The concept of taxation has always left most of us often lost and quite befuddled as well. Most of us also find the matter of taxes scary and quite stressful, especially when it comes to the matter of foreign income. There is one specific area of taxation that is relatively complex, yet is vital to be understood, especially by persons who deal with MNCs, the area being the taxation of expatriates.

Terms You Need to Know

1. Expatriate: There is no specific definition as per the Income Tax Act, 1961, so we rely on the general meaning of the word. A person living in a country other than his or her country of citizenship, often temporarily and for work reasons. The person takes a position outside his or her home country, either independently or as a work-related assignment arranged by the employer, which can be a university, company, non-governmental organisation, or government.
2. Residential Status: Residential status of a person is determined on the basis of the physical presence in India and as per Section 6 of the Income Tax Act. For the taxation of expatriates, the residential status has to be determined as per the Income Tax Act as well as the Double Taxation Avoidance Agreement.
3. Employee Stock Option Plan (ESOP): Under this plan, the employees are given a right to buy a specified number of shares at a fixed price within a stipulated period of time. In simple words, it is an incentive to retain the talented key employees in the company and also a means of motivation for the employees that translates to them feeling like an actual part of the company, considering they’ve invested in the stocks of the company.
4. Double Taxation Avoidance Agreement (DTAA): A tax treaty that is signed between two or more countries for helping taxpayers in avoiding double tax payments on the same income as set out under Section 90 of the Income Tax Act. India currently has DTAA with 88 countries out of which 86 are in force. The DTAA becomes applicable in cases where an individual is a resident of one nation but earns income in another.
5. Social Security Agreement (SSA): The idea behind signing a Social Security Agreement between countries is with the prime objective of protecting the interests of cross border workers. This is done with the objective of ensuring that workers from both countries are treated equally in terms of social security.
6. Certificate of Coverage (COC): Whenever an employee works for an employer, they are required to make a contribution to the Social Security scheme of the country they are working in, for example, in India employees need to contribute to EPF. However, in the cases where an employee is working in a foreign country, they have to contribute to the social security of that country. In cases where the term of employment is short, the employee won’t be able to reap its benefits. In this case, the employees can ask to claim exemption from the foreign country’s social security as long as he/she is contributing to their EPFO or home social security system. This is done by getting a certificate from EPFO.
7. Income Tax Clearance Certificate (ITCC): Before leaving the territory of India, an expatriate is required to obtain a tax clearance certificate from a competent authority stating that he does not have any outstanding tax liability. Such a certificate is required in case the continuous presence in India exceeds 120 days.

Arriving at the Calculation of Taxation for Expatriates

Tax Rates: The income rates applicable to expatriates is as follows:-

Taxable Income	Income Tax Rates
Up to Rs. 2,50,000	Nil
Rs. 2,50,000 – Rs, 5,00,000	5%
Rs. 5,00.000 – Rs. 10,00,000	20%
Rs. 10,00,000 and above	30%

Residential Status: For an expat, the residential status is to be determined as per two views, that is, the Income Tax Act and the DTAA. There are certain instances where the expat may be a resident of both countries as per the relevant taxation laws. This gives rise to the ‘Tie Breaker Rule’. The factors to be considered for this are as follows:-

Factors	Description
(i)  Permanent home	The country in which he/she has a permanent home available to him/her
(ii) Centre of vital interest	The country with which his/her personal and economic relations are closer
(iii) Habitual abode	The country in which he/she has a habitual abode
(iv) Nationality	Country of which he/ she is a national
(v) Competent authorities	As determined by mutual agreement between both the countries competent authorities

The basic rule of taxation of salary income is that salary is taxable in the country where the employee is physically present while rendering services.

Deemed Tax Residents: An individual who is an Indian citizen shall be deemed to be a resident of India in the previous year if he is not liable to pay tax in any other country or territory.

Scope of Income:

Resident	Not Ordinarily Resident	Non Resident
All income earned globally	Income received in India	Income received in India
	Income sourced from India	Income sourced from India
	Income from a business that is controlled from India

Provident Fund and SSA: According to the provisions of the PF scheme, the employer, as well as an employee, will contribute 12% of monthly pay (as defined in the EPF and MP Act). Out of the employer’s contribution, 8.33% of monthly pay will be towards the pension fund, and balance 3.67% will be towards Provident Fund. The interest rate applicable to the EPF contributions is 8.5% for FY 2020-21. Salary will include the total salary whether received in India or abroad.
For an international worker, if he is from a country with whom India has signed a Social Security Agreement (SSA) and has a Certificate of Coverage from the home country, he need not contribute to the social security in India provided he furnishes the COC to the PF authorities.

Basis	PF Withdrawal	Pension Withdrawal
Where an SSA exists	As per the SSA provisions	As per the SSA provisions
No SSA exists	·   On retirement from services after attaining an age of 58 years·   On retirement on account of permanent incapacitation specified by a medical practitioner	·       After the attainment of 58 years of age subject to the satisfaction of the necessary conditions

Per Diem Allowance/Daily Allowance: In order to compensate employees for the living changes, they have to endure as they take on an assignment in foreign countries, a daily allowance over and above the salary is paid to them. The Income Tax Rules state that any ordinary daily allowance paid, while on tour, is exempt insofar as it is incurred for the purpose of daily living expenses.

Employees Stock Option Plan (ESOP): As far as ESOP is concerned, shares issued under ESOP are taxable in the hands of the employees at the time at which they are exercised.

Taxability of expatriates, as a whole, is a rather interesting area which has seen various amendments take place over the past few years especially. Significant efforts have been made to ensure that more clarity has been provided regarding the taxability of such persons and other foreign nationals.

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