Pay of employees deputed abroad isn't taxable in India, TDS doesn't apply

A new AAR ruling provides relief to employees deputed overseas and who receive salaries abroad as well as in India

Individuals deputed abroad and taxed in another country would no longer be subjected to double taxation. Last week, Authority for Advance Ruling (AAR) said that individuals who are non-residents according to the Income-tax Act (I-T Act), don’t need to pay tax on salary received in India. The ruling provides relief to employees who are deputed overseas and receive a salary abroad as well as in India.

The double taxation of salary has been controversial due to conflicting laws. “Section 9 of the I-T Act says an individual who earns income in India or deemed to have earned income in the country, needs to pay tax on it. At the same time, the laws dealing with tax treaties with other countries say that the income will only be taxed in the country where the services are rendered,” says Naveen Wadhwa, general manager, Taxmann.com.

Wadhwa says there have been Supreme Court rulings that an individual can either choose to pay tax based on domestic laws or the regulations covered under the tax treaties, whichever of the two that benefits him more. If he decides to pay taxes as per the treaty provisions, the domestic laws will not apply. Despite this, tax authorities been taxing the Indian income of non-residents.

Many employees deputed abroad suffer tax deduction at source on the salaries paid into their accounts in India. Such employees have had to claim a credit from Indian tax authorities later as they had already paid the tax overseas. Many countries, such as the US, tax the global income of individuals who have become residents (stayed there for 183 days) according to its tax laws.

Double taxation has resulted in extra paperwork and cash flow problems. Going by the ruling, employers don’t need to deduct tax anymore. Going by the decision of AAR, the ruling is not only applicable to countries with which Indian government has signed tax treaties but also in cases where there’s no tax treaty, or where the employee doesn’t need specific conditions under the treaty. But AAR is a quasi-judicial body that does not set a precedence like a tribunal or a court does. The ruling only has a persuasive value and its decisions are considered by the tax department.

Typically, when an Indian company sends an employee abroad for an assignment, he receives salary abroad as well as in India. The employee is transferred on the payroll of the company abroad, which pays him a basic salary and allowances and claims a deduction for it. The Indian employer also deposits a portion of the salary in the Indian bank account so that the employee can manage his equated monthly instalments and household expenses. “The mere fact that an Indian company is giving some amount to its employee shouldn’t make it (the amount) subject to tax. The taxability needs to be looked only by determining the residence status of an individual,” says Abhishek Rastogi, partner, Khaitan & Co. 

The income tax laws stipulate that an individual can be considered as a resident or a non-resident depending on the number of days he has lived in the country. To qualify as a resident Indian in financial year 2018-19, for example, an individual should spend at least 182 days in India, between April 1, 2018, and March 31, 2019. Also, if a person spends at least 365 days during the four years preceding the financial year and 60 days in 2018-19, he would be considered as a resident. If these conditions are not met, the individual is classified as non-resident. The global income of residents, irrespective of where it is earned, is taxed in India.

Determine your residential status

• Resident: He is in India for 182 days or more during the financial year or for at least 365 days during the four years preceding that year NS at least 60 days in that year.
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• Resident but not ordinarily resident: If you have been an NRI in nine out of 10 financial years preceding the current year
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• Non-resident: Anyone who doesn't fulfil the above conditions