In the recent past, with India becoming a more business-friendly country and with foreign companies looking to expand their footprint in India – this has seen foreign nationals or expatriates from different countries plan their business stay in India. This includes not just short-term stay for project management, but mid-to-long-term planning to develop sustainable business operations over a period of time.
Apart from overseeing project management, the stay of expatriates in a different country – say India in this case, allows them to identify the right stakeholders in a new environment who can further help them with business expansion in a new market.
And when it comes to exploring a new market and its technicalities, it entails the need to understand domestic taxes, double taxation agreements, and personal tax implications which must be borne by the foreign companies sending their expats to India, so that they can plan their cash flows better. And for the expats as well, it’s imperative to not merely obtain the various legal/financial registrations mandatory for expats, but to further involve active tax planning techniques and their subsequent compliance for taxation in India.
The primary criteria for determining the extent of income which is liable to any sort of taxation in India is the residency of an individual. Having said that, any income that accrues or arises in India regardless of the said individual’s residency in India is liable to be taxed in India, subject to the provisions of the tax treaty between India and the said individual’s home country/territory. This could include any income source, be it investment, salaries, or any form of capital gains, etc. Foreign Tax Credit of such taxes paid in India is invariably allowed in their home country, subject to the provisions of their local income tax laws and tax treaties with India.
Let’s look at this from the perspective of salaried employees (expat employees) first. For expatriates who come for employment-related purposes and are assigned to work in India by the parent foreign company (be it on a project or with the Indian subsidiary of the said foreign company), they earn a certain salary in India for rendering their services in India itself. By that logic, since their income arises/accrues in India – and hence, they are liable to be taxed in India.
India follows a source-based taxation model, where if the source of the income is in India, then the said income gets taxed in India as per Indian tax laws. This is in contrast to other major countries, say the United States for example – which essentially follows a residency-based model for taxation and it taxes the individuals who are residents of the United States as per its laws, for the income which can arise in other sources as well as the US.
NRIs (Non-Resident Indians), as suggestive of their names, are Indian citizens who have stayed for less than 182 days in India in the preceding financial year (FY). Such persons stay abroad either on account of their employment, or for carrying out a business/vacation outside India or for such purposes that indicate their intention of staying outside India for an uncertain period. They may or may not visit India at frequent intervals. NRI’s are liable to pay taxes in India on the income earned from/through different sources of income or via their assets in India.
Expatriate employees on the other hand, are foreign citizens (who may or may not be Persons of Indian Origin [PIO]) who come to India on deputation/secondment or otherwise for the purpose of taking up employment in India.
As per the visa rules of India, expatriate employees are to be paid a minimum annual salary of USD 25,000 and are mandatorily required to be enrolled under the social security regulations of India, subject to such regulations being applicable on their Indian employer and also subject to the employee being from a country with whom India has entered into a Social Security Agreement (‘SSA’). The salaries paid to them are invariably chargeable to tax in India subject to the provisions of the tax treaty which is in place between India and with the said individual’s home country/territory.
Expatriate income tax is calculated in the same manner and at the same tax rates as that applicable to the individuals in India, on the incomes accruing/arising to them in India.
That means an expatriate employee earning a salary will pay the same tax as an Indian employee earning a salary and the taxes will be charged as per the fixed brackets of income, where income up to INR 2,50,000 is not taxed, income between INR 2,50,000 – 5,00,000 is taxed at 5%, a rate of 20% is applicable to income between INR 5,00,000 – 10,00,000 and a rate of 30% is applicable to any income beyond INR 10,00,000.
On the applicable tax rate, surcharge and education cess (4% education cess) is also applicable which is computed based on the rate of surcharge and education cess. Similarly, expats are taxed on capital gains or dividends in India like any Indian taxpayer as the said income accrues or arises in India.