Expatriates Taxation in India

India is a fast growing economy with many multinationals setting up shop in India.  This means that quite a number of Expatriates of various nationalities come into India and they would in turn like to know tax impact on their salaries earned in India and abroad.  To ascertain tax status of these expatriates in India we need to review 

1. Section 5, 6, 9 and 10 of Income Tax Act, 1961.
2. Indian Provident Fund Scheme, 1952 (specifically notification dated 1.10.2008)

Section 6 - Residence in India
Residence in India determines the taxable status of an individual in India.  The following are the various definitions under Income Tax Act, 1961 on Resident status.

Resident	1.      Was in India for a period of minimum 182 days during that year or 2.    Was in India during the year for a period of minimum 60 days and in the preceding 4 years was in India for a minimum period of 365 days
Non Resident	A person who is not a Resident is a Non Resident
Not Ordinarily Resident	1.      Non Resident in 9 out of 10 years preceding that year or 2.      In India for a period of 729 days or less during the preceding 7 years

Section 5 - Scope of Taxation

The incomes which are taxed are as given below for each category of Residency.

Resident	1.    Received or is deemed to be received in India during the year 2.   Accrues or arises or is deemed to accrue or arise in India during the year 3.   Accrues or arises outside India during the year
Non Resident	1.     Received or deemed to be received in India during the year 2.     Accrues of arises or deemed to accrue or arise in India during the year
Not Ordinarily Resident	1.    Received or is deemed to be received in India during the year 2.   Accrues or arises or is deemed to accrue or arise in India during the year 3. Accrues or arises outside India during the year provided it is derived from a business controlled in or a profession set up in India

Section 9(1)(ii) - Income deemed to accrue or arise in India

Salaries if earned in India for 

1. Services rendered in India and 
2. for the leave period which forms part of the service contract of employment

The either of the above 2 conditions if satisfied will entail taxation in India.  Section 9(1)(ii) will hold good irrespective of Residence status.

Taxation impact under Income Tax Act

Due to operation of section 9(1)(ii) salary received for services rendered in India will be taxable in India irrespective of place of receipt of salary.  For example if an Expatriate receives salary of Rs.100,000 in India and $5,000 in US, for services rendered in India, then the entire amount of Rs.100,000 and $5,000 are taxable in India

Section 10(6) - Exceptions to the above taxation Rule

Exceptions to the taxation are provided for 

1. Employees of Consulate etc
2. Remuneration paid by a foreign enterprise for service rendered in India if 
• the foreign enterprise is not engaged in any trade or business in India
• the employee stay is not more than 90 days in the year
• the remuneration paid by the foreign enterprise is not deducted from income of the enterprise for purpose of income tax in India

Provident Fund
International worker is defined to include a Foreign National working in India.  India has signed social security agreements till todate with 3 countries namely Belgium, France and Germany.  Foreign Nationals who belong to these countries do not come under the definition of International workers.  Other Foreign Nationals should contribute the Provident Fund Scheme in India.  Provident Fund is to be 

1. Deducted at 12% - employee contribution and 12% - employer contribution - total 24% contribution
2. To be deducted on the full salary both received in India and also abroad and also from the parent company abroad

Conclusion

Expatriate employees come under purview of income tax and provident fund acts.  There are certain exemptions which can be claimed.  Taxation aspects are quite clear and hence care should be taken to abide by them

Account Code for Payment of Service Tax

With the changes in Service tax due to introduction of 'Negative list', the account codes for payment of service tax has also being changed to provide for payment under one head called "All Taxable Services"

Circular No.F.No.341/21/2012-TRU has been issued dated 6.7.2012 providing for the below account codes.

Accounting codes for the purpose of payment of service tax under the Negative List approach, with effect from 1^st July, 2012 is as follows:

Name of Services	Accounting codes
	Tax collection	Other Receipts	Penalties	Deduct refunds
All Taxable Services	00441089	00441090	00441093	00441094

NOTE: (i) service specific accounting codes will  also continue to operate, side by side, for accounting of service tax  pertaining to the past period (meaning, for the period prior to 1^st July, 2012); (ii) Primary Education Cess on all taxable services will be booked under 00440298  and Secondary and Higher Education Cess on all taxable services will be booked under00440426  ; (iii) a new sub-head has been created for payment of “penalty”; the sub-head “other receipts” is meant only for payment of interest etc. leviable on delayed payment of service tax; (iv) the sub-head “deduct refunds” is not to be used by the assessees, as it is meant for use by the Revenue/Commissionerates while allowing refund of tax.

Income Tax Returns from Assessment Year 2012-13 - Mandatory e-filing

From the Assessment year 2012-13 the income tax department has made e-filing compulsory for the following categories of tax payers vide Notification number S.O.626(E), dated 28.3.2012.  

1. an Individual or a HUF whose total income is more than Rs.10 lacs
2. an Individual or a HUF, who is a resident, having assets (including financial interest in any entity) located outside India or signing authority outside India and required to furnish tax returns under ITR2 or ITR3 or ITR4

CBDT has further clarified under its Press Release No.402/92/2006-MC (12 or 2012) dated 2.7.2012 that though e-returns are mandatory for the above 2 categories, digital signature is not mandatory.  The assesses can transmit the data in the return electronically and thereafter submit for verification to ITR-V to CPC in Bangalore by ordinary post within 120 days.

 

To clarify 

• ITR1 is for tax payers with 
• salary or pension income
• Rental income from one property
• capital gains that are tax free
• Interest from interest and other sources
• ITR2 is for tax payers with
• salary or pension income
• Rental income from more than one prpoerty
• Any Capital losses or Capital gains
• Income from other sources
• Foreign assets
• ITR3 is for tax payers with 
• Interest from salary, bonus, commission or remuneration
• Capital gains
• More than one house rental income with carried forward losses
• Income from other sources
• ITR4 is for tax payers with
• Income from business or profession
• Income from other sources
• Foreign assets
• ITR5 is for Firms
• ITR6 is for Companies

E-filing of income tax returns can be done through website of the CBDT @ https://incometaxindiaefiling.gov.in/portal/index.jsp.  One has to login using their PAN number and then download the relevant ITR.  Once the ITR is completed there is a Submit Return icon available through which online return can be filled and ITR-V can be generated to forward to CPC in Bangalore.

Service Tax from 1.7.2012 - Changes a review

Collection of Service Tax has undergone a sea change today with the Government notifying 1.7.2012 as the date for implementation of "Negative List Based Taxation" for Service Tax.  To enable this the Government has carried out the following changes.

1. Rescinded Sections 65, 65A, 66 & 66A in Finance Act, 1994
2. Introduced Sections 65A, 66B, 66C, 66D, 66E & 66F in Finance Act, 1994
3. Issued Notifications Nos.25/2012-ST to 40/2012-ST dated 20.06.2012

What is this Negative List - Section 66D

Negative list consists of 17 services on which there is no service tax is charged (ie) these 17 items are exempt from Service Tax.   These include services provided by Central & State Governments, local authority, RBI, Services by foreign Diplomatic missions in India, services relating to agriculture, manufacturing of goods, trading of goods, transmission and distribution of electricity, admission to entertainment events, services by way of renting residential buildings, transport of passengers in State Transport vehicles (however First class and air-conditioned rail travel attracts service tax), transportation of goods other than GTA and courier, funeral, burial, cremation and mortuary services.  

What is taxable under Service Tax? Section 65B (44)

Other than the negative list all other services are taxable.  Service is defined under Section 65B, Clause (44) "to mean an activity carried out by a person or entity for another for consideration".  In short, all services are taxable other than those specified under Section 66D (Negative List). 

Mega Exemption List - Notification No.25/2012-ST dt.20.6.12

The complexity does not stop here, the Government has notified vide Notification Number 25/2012-ST dated 20.06.2012 a list known as Mega Exemption List.  This list consists of 39 items which are exempted from Service tax apart from the Negative List provided in Section 66D.

So a Service Provider has to check Section 66D & Mega Exemption List to check his nature of service and pay tax on the same.  

Reverse Charge - Notification No.30/2012-ST dt.20.6.12

To add masala to the service tax act this notification No.30/2012-ST dt.20.6.12 has been issued.   Which lists 11 services of which 8 services need to be paid by the receiver of services and balance 4 services need to be paid in a given proportion by the provider and receiver.   The gist of the items are as listed below

Table

Sl.No.	Description of a service	Percentage of  service tax payable by the person providing service	Percentage of service tax payable by the person receiving the service
1	in respect of  services  provided or agreed to be provided  by an insurance agent to any person carrying on insurance business	Nil	100%
2	in respect of  services  provided or agreed to be provided  by a goods transport agency in respect of transportation  of goods by road	Nil	100%
3	in respect of  services  provided or agreed to be provided  by way of sponsorship	Nil	100%
4	in respect of  services  provided or agreed to be provided  by an arbitral tribunal	Nil	100%
5	in respect of  services  provided or agreed to be provided  by individual advocate or a firm of advocates by way of legal services	Nil	100%
6	in respect of  services  provided or agreed to be provided  by Government or local authority by way of support services excluding,-  (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994	Nil	100%
7	(a)   in respect of  services  provided or agreed to be provided  by way of renting of a  motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business (b)   in respect of  services  provided or agreed to be provided  by way of renting of a  motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business	Nil 60%	100 % 40%
8.	in respect of  services  provided or agreed to be provided  by way of supply of manpower for any purpose	25%	75 %
9.	in respect of  services  provided or agreed to be provided  in service portion in execution  of works contract	50%	50%
10	in respect of  any taxable services  provided or agreed to be provided  by any person who is located in a non-taxable territory and received by any person located in the taxable territory	Nil	100%

Abatement 

All earlier abatement notifications have been rescinded and a fresh notification number 26/2012-ST dt.20.6.2012 has been issued mandating the abatement percentages.  The following is the new abatement table

Table

Sl. No.	Description of taxable service	Percent- age	Conditions
(1)	(2)	(3)	(4)
1	Services in relation to financial leasing including hire purchase	10	Nil.
2	Transport of goods by rail	30	Nil.
3	Transport of passengers, with  or without accompanied belongings by rail	30	Nil.
4	Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises ( including hotel, convention center, club, pandal,shamiana or any other place, specially arranged for organizing a function) together with renting of such premises	70	(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
5	Transport of passengers by air, with or without accompanied belongings	40	CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
6	Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.	60	Same as above.
7	Services of goods transport agency in relation to transportation of goods.	25	CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.
8	Services provided in relation to chit	70	Same as above.
9	Renting of any motor vehicle designed to carry passengers	40	Same as above.
10	Transport of goods in a vessel	50	Same as above.
11	Services  by a tour operator in relation to,- (i)  a package tour	25	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The bill issued for this purpose indicates that it is inclusive of charges for such a tour.
	(ii)  a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour	10	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The invoice, bill or challan issued indicates that it is towards the charges for such accommodation. (iii) This exemption shall not apply in such cases where the invoice, bill or challanissued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.
	(iii) any services other than specified at (i) and (ii) above.	40	(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii)The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.
12.	Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority	25	(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii)The value of land is included in the amount charged from the service receiver.

New Service Tax Rules

Notification Number 36/2012-ST dt.20.06.12 have promulgated new Service Tax Rules known as Service Tax (Second Amendment) Rule 2012.  These rules have brought in some procedural changes in Service Tax regime.

Place of Provision of Services (POPS)

Notification No.28/2012-ST dt.20.6.12 has notified Place of Provision of Service Tax, Rules 2012.  This rule is relevant to determine where the services are rendered, whether it is within or outside India.