Tax issues for individuals travelling abroad
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Taxability in India is based on an individual’s residential status. As per the Indian Income Tax Act, 1961, an individual may be an Ordinary Resident (OR), Non Resident (NR) or Not Ordinarily Resident (NOR) based on the number of days of physical presence in India.
The residency rule is liberal for Indian citizens leaving India for taking up employment outside the country and is triggered only if the individual spends more than 182 days in India in the year of departure. However, in the year of return, the 60 days rule shall be applied for determining residential status.
A NR and NOR is taxable only on India-sourced income or income received in India. However, an OR is taxable on worldwide income in India. So, if an individual leaves India for the purpose of taking up employment abroad but still continues to be an OR in a particular year, he shall be taxable on income earned in India and outside the country, irrespective of where he renders his services or receives salary.
Double taxation shall arise when an individual is taxed on the same source of income in more than one country. Both the domestic tax laws and Double Taxation Avoidance Agreements (DTAA or tax treaty) entered into by India with various countries provide relief to Tax Residents to mitigate double taxation.
The domestic tax laws provide the mechanism of claiming relief — bilateral (where DTAA exists) and unilateral (where no DTAA exists). But in cases where the individual qualifies a NR, there will not be any relief when deputed to a country with which India does not have a DTAA.
BRITISH GAS RULING
The Authority for Advance Ruling (AAR), in the case of British Gas held that salary paid by employer to employees for rendering services outside India shall not be taxable in India in accordance with the provisions of Indo-UK DTAA.
The issue before the AAR was whether the salary paid in India by the Indian company was liable to tax in India and whether the Indian company was required to withhold tax on the salary paid by it. The AAR held that as per the DTAA, since the employees are drawing their salary in respect of the employment being exercised in the UK, the salary shall be taxable only in UK.
The Indian company is not required to deduct tax at source u/s 192 of the Act even if the salary is delivered in India.
However, to claim such benefit, it has to be amply demonstrated that the individual is a Tax Resident of the host country and subject to tax there on such income; otherwise the principle of British Gas Ruling will fail.
EMPLOYEE STOCK OPTION PLAN (ESOP)
There are four key events in a ESOP — grant, vesting, exercise and sale. Depending on where an individual is at the time of these key events, the taxing implications in India may differ.
OR – Taxable both at exercise (as salary income) and sale (capital gains)
NR/NOR – Taxable only if worked in India for vesting period (salary income) and on sale only if consideration is received in India (assuming shares of a foreign company)
There is a general misconception that once an employee leaves India, he is not required to pay tax on the income earned abroad. Often this is not the case and it is essential that one carefully analyses Indian tax rules before taking up a secondment to avoid being out of pocket later.