- Contact Details
- Additional Information
All expatriates are taxed on any compensation received for services rendered in India. Compensation would include salary, fees, commissions, profits in lieu of or in addition to salary, advance salary, allowances and benefits in kind. In case of a foreign expatriate working in India, the remuneration received by him, assessable under the head ‘Salaries’, is deemed to be earned in India if it is payable to him for services rendered in India as provided in Section 9(1)(ii) of the Income Tax Act. The explanation to the aforesaid law clarifies that income in the nature of salaries; payable for services rendered in India shall be regarded as income earned in India. Irrespective of the residential status of the expatriate employee, the amount received by him as salary, for services rendered in India shall be liable to tax in India being income accruing or arising in India, and also be subject to TDS regardless of the place where the salary is actually received.
Where salary of an expat is payable in foreign currency, the amount of the tax deducted is to be calculated after converting the salary payable into Indian currency at the telegraphic transfer buying rate as adopted by State Bank of India on the date of deduction of tax (Rule 26) read with Section 192(6) of Indian Income Tax Act. It may be noted that this rule is applicable only for determination of Income Tax in TDS. However, in computing the salary income, the rate of conversion to be applied is the telegraphic transfer buying rate on the last day of month in which the salary is due or is paid as per Rule 15 of Indian Income Tax Act. In simple words, both the Indian Salary as well as the Foreign Salary of an Expatriate are liable to Tax and Deduction of TDS.
Grossing up of Income in case of Expatriate Taxation: The agreements related to expatriates are formed in a way that tax burden is not on the expatriate but on the company to which he/she is sent. For example when a Japanese Expatriate is sent to India, then the income tax burden of that expatriate will be on the Indian Concern and not on the expatriate employee. This gives rise to the concept of grossing-up. The expatriate employee gets the net salary and tax on this is paid by the Indian company. Thus if the salary given to the expatriate is Rs.100, assume the tax on it is Rs.30, Rs.30 will be paid by the company. Now this will make total amount paid to expatriate Rs.130 (Rs.100 as his net salary and Rs.30 as his tax, which has to be paid by any individual on his salary in normal course of taxation).
Now grossing-up comes into play, as tax will be paid, not on Rs100 but Rs.130. Like in our case we get salary and we pay tax from our own pocket thus we get salaries our inclusive of tax we pay. In the same way an expatriate’s salary is to be considered as net salary + tax liability on it, as it has been borne by the company. Now the maximum Rate of Income Tax is 30% and education cess is 3%, thus total tax rate is 30.9%. In earlier paragraph it was mentioned that tax is to be barred by the company, so now company will have to calculate grossed-up tax on the net salary i.e. Rs.100 in order to cover the total amount paid (Rs.130 mentioned in example) i.e. net salary as well as the tax burden for the purpose of computing tax liability.
So the formula through which grossed-up tax rate is to be computed is: 30.9 × 100/ (100-30.9). Here 30.9 is the maximum tax rate charged for an individual, earlier it was 33.99 due to presence of surcharge, which is not applicable for individuals anymore. Through this formula we’ll get 44.71% rate of grossed-up tax, earlier which was 51.49% due to presence of surcharge. This is being mentioned because if the tax rates are amended (i.e. taxes abolished or added), this formula would change accordingly.
Fringe Benefit Tax: FBT is to be levied on the employer in respect of fringe benefits provided/deemed to be provided by the employer to his employee(s). Such fringe benefits are generally not taxable in the hands of the employee. The provisions of FBT are equally applicable to foreign companies if they have employees based in India.
Stock incentive schemes: Effective 1 April 2007, stock-based income has been brought under the ambit of FBT. The rules governing the taxation of such income are summarized below:
FBT will be levied on the employer with respect to any allotment or transfer (directly or indirectly) of any specified securities or sweat equity shares to its employees (including any former employee or employees)
FBT will be payable on the difference between the Fair Market Value (FMV) of the securities on the date of vesting and the amount recovered from the employee.
For a company not listed on a recognized stock exchange in India, the FMV would need to be certified by a Securities and Exchange Board of India (SEBI) registered Category 1 Merchant Banker in India. For a company listed on a recognized stock exchange in India, the FMV will be linked to the market price of the securities.
The amount subject to FBT will be considered as cost of acquisition for computing capital gains tax in the hands of the employee at the time of sale of such securities.
The employer can recover the FBT from the employees.
- The FBT so recovered from the employees, is deemed to be tax paid by the employee and may be eligible for credit overseas. However, the availability of credit needs to be confirmed by the home country.
Income tax rates and tax compliance requirements: Indian tax law requires all employers to deduct tax when paying salary to their employees and deposit the same with the authorities within seven days from the last day of the month in which such payments are made. Any failure on the employer’s part to do this could attract stringent fines and penalties, in addition to the taxes not withheld.