Legal obligations for Expatriates + Foreign Citizens in India
A. Legal obligations for Expatriates in India
1. Introduction of Legal obligations for Expatriates in India
(i) In 1991 of India has opened up the Indian Industrial Policy for the Foreign Investors under the Prime ministership of late Sh. Narsimha Rao through his finance minister Dr. Manmohan Singh
(ii) The foreign companies have welcome the Indian Industrial Policy and set up the subsidiary companies, branch offices (BO) and liaison offices (LO) in India.
(iii) India has received foreign investments (FI’s) through the following modes
(a) Foreign Direct Investment (FDIs) in equity shares
(b) Convertible Debentures (CDs)
(c) Convertible Preference Shares (CPSs)
(d) Shares warrants (SWs)
(e) American Deposit Receipts (ADRs)
(f) Global Deposit Receipts (GDRs)
(g) Foreign Currency Convertible Bonds (FCCBs)
(h) Real Estate Investment Trust (REIT)
(i) Alternative Investment Fund (AIF)
(j) Indian Depository Receipts (IDRs)
(iv) Expatriates are coming to India since 1991. Hence question of legal obligations for expatriates working in India is arises for the expatriates and employers (both)
(v) Term Expatriates includes:
(a) The term Expatriate includes a person came from out of India.
(b) The Indian Income-tax Act (ITA) 1961 is not specifically defining the term Expatriate.
(c) Expatriates are employees coming from out of India and working in India based on deputation or secondment.
(d) Expatriates are foreign nationals commonly known as foreign citizens sent by their foreign employers to work in India
(vi) Expatriates are coming to work in India under any of following arrangement:
(a) Business visit in India
(b) Short term assignment in India
(c) Medium term assignment in India
(d) Long term assignment in India
(e) Permanent relocation in India
(f) Visiting as consultant in India
2. Availability of VISA for Expatriates working in India
(i) Expatriates are permitted to work in India based on the followings categories of VISA’s
(a) Business VISA
(b) Employment VISA
(c) Student VISA
(ii) Expatriates are required to register themselves with the Foreign Regional Registration Office (FRRO) within 14 days from date of their arrival in India.
3. Taxability for Expatriates working in India
(i) Salary Income of the expatriates against the services rendered in India is taxable in India besides the place of receipt of salary in India or outside India.
(ii) Salary Income of the expatriates against the services rendered in India is taxable in India based on the concept of source of Income besides the place of receipt of salary in India or outside India.
(iii) Term salary includes:
(a) Salaries
(b) Various Allowances daily allowances
(c) Benefits
(d) Perquisites
(e) Accommodations
(f) Car Services
(g) Chauffer Services
(h) Relocation allowance
(i) Stock options
(j) Gifts
(k) Free or concessional vouchers
(l) Etc.
(iv) (a) Employers are required to deduct withholding tax (TDS) on the payments made or to be made against the services provided in India.
(b) Employers are liable to pay penal interest, financial penalty and also imprisonment for not deducting and also not depositing the TDS.
4. Residential Status of the Expatriates working in India
- Residential status of expatriates working in India is to be decided based on the physical stay in India.
(i) Resident of India as Individual is determined with the 2 options under section 6(1) of the ITA, 1961
(a) When any Individual as citizen or non-citizen of India is staying for minimum 182 days in India in the previous financial year is called a Resident of India
or
(b) When any Individual as citizen or non-citizen of India is staying for minimum 60 days in India in the previous financial year
and
(c) Also already stayed for minimum 365 days in the last 4 preceding to the previous financial year is also called a Resident of India
(d) Hence total Global incomes of the resident are to be taxed in India.
(ii) Resident of India as Individual is also determined with 1 more option under section 6(1) of the ITA, 1961
(a) When an individual as citizen of India is staying for minimum 182 days in India in the previous financial year
and
(b) Also leaving India for employment or leaving as a crew member on a ship is also called a Resident of India.
(c) Henceforth in 2nd option of above mentioned para (i) (b) is replaced with minimum 182 days instead of 60 days in the financial year
and
(d) Also already stayed for minimum 365 days in the last 4 preceding to the previous financial years is also called a Resident of India
(e) Hence total Global incomes of the resident are to be taxed in India.
(iii) Resident of India as Individual is also determined with 1 more option as applicable from April 01, 2020 for the previous financial year ending on March 31, 2021 and for the Assessment year 2021‐22
(a) Now a citizen of India or a person of Indian origin who is living outside India and coming to visit India during previous financial year
and
(b) Also his total Indian incomes are exceeding Rs. 15 Lac
and
(c) Also already stayed in India for minimum 120 days instead of 182 days as earlier
and
(d) Also already stayed in India for minimum 365 days during 4 preceding to the previous financial year is also called a Resident of India
(e) Hence total Global incomes of the resident are to be taxed in India.
(iv) Ordinary Resident of India as Individual under section 6(6) of the ITA, 1961
(a) When any individual as citizen or non-citizen of India is staying in India for minimum 182 days in the previous financial year
and
(b) Also the Individual was resident in India for minimum in 2 previous financial year out of 10 preceding to the previous financial year.
or
(c) Also the Individual already stayed in India for a minimum 730 days during 7 preceding to the previous financial year is called an ordinary resident of India
(d) Hence total Global incomes of the ordinary resident are to be taxe in India.
(v) Not Ordinary Resident of India as Individual under section 6(6) of the ITA, 1961
(a) When any individual as citizen or non-citizen of India is staying in India for minimum 182 days in the previous financial year
and
(b) Also the Individual was resident of India for maximum in 1 previous financial year out of 10 preceding to the previous financial year
or
(c) Also the Individual already stayed in India for maximum 729 days during 7 preceding to the previous financial year is called a not ordinary resident of India.
(d) (da) Now a citizen of India or a person of Indian origin having total Indian income is exceeding 15 Lac during the previous financial year.
and
(db) He is staying in India for minimum 120 day and maximum 182 days during the previous financial year
(e) Indian incomes of the not ordinary resident are to be taxed in India. Hence global incomes – (Minus) Indian incomes are not to be taxed in India.
(vi) Non Resident of India as Individual under section 6(6) of the ITA, 1961
(a) When any individual as citizen or non-citizen of India is not qualifying any condition of becoming resident of India is to be treated as non-resident of India.
(b) Hence any individual if not a resident of India then the person is to be treated as non-resident of India.
(c) Indian incomes of the non-resident are to be taxed in India. Hence global incomes – (minus) Indian incomes are not to be taxed in India.
5. Taxability of Incomes of Expatriates working in India
(i) Expatriates are required to offer their global income to be taxed in India where he is resident of India
(ii) Expatriates are required to offer their Indian income to be taxed in India where he is non-resident of India
(iii) Expatriates are required to offer their Indian income to be taxed in India where he is resident but not ordinary resident of India
(iv) Income includes:
(a) Income received in India or
(b) Income deemed to be received in India or
(c) Income accrues or arises in India or
(d) Income deemed to accrues or arises in India
(v) Receipt basis versus Accrual basis
(a) Expatriates are permitted to offer their income on receipt basis or accrual basis as an option is available
(b) Expatriates are required to offer their income on accrual or arises basis when right to receive the income is become vested in the hands of expatriates
6. Rate of taxes for Expatriates working in India
(i) Rate of taxes under existing (normal) tax rates
(a) Taxable income up to 2.50 Lac @ 0%
(b) Taxable income between 2.50 and 5 Lac @ 5.20% (incl. cesses @ 4% on rate of tax)
(c) Taxable income between 5 and 10 Lac @ 20.80% (incl. cesses @ 4% on rate of tax)
(d) Taxable income between 10 and 50 Lac @ 31.20% (incl. cesses @ 4% on rate of tax)
(e) Taxable income between 50 Lac and 1 Cr @ 34.32% (incl. cesses @ 4% and surcharge 10% on rate of tax)
(f) Taxable income between 1 and 2 Cr @ 35.88% (incl. cesses @ 4% and surcharge 15% on rate of tax)
(g) Taxable income between 2 and 5 Cr @ 39.00% (incl. cesses @ 4% and surcharge 25% on rate of tax)
(h) Taxable income above 5 Cr @ 42.74% (incl. cesses @ 4% and surcharge 37% on rate of tax)
(ii) Rate of taxes under alternative (new) tax rates- Section 115BAC of ITA, 1961
(a) Taxable income up to 2.50 Lac @ 0%
(b) Taxable income between 2.50 and 5 Lac @ 5.20 (incl. cesses @ 4% on rate of tax)
(c) Taxable income between 2.50 and 5 Lac @ 10.40% (incl. cesses @ 4% on rate of tax)
(d) Taxable income between 7. 5 and 10 Lac @ 15.60% (incl. cesses @ 4% on rate of tax)
(e) Taxable income between 10 and 5 Lac @ 20.80% (incl. cesses @4% on rate of tax)
(f) Taxable income between 12.5 and 15 Lac @ 26% (incl. cesses @ 4% on rate of tax)
(g) Taxable income between 15 and 50 Lac @ 31.20% (incl. cesses @ 4% on rate of tax)
(h) Taxable income between 50 Lac and 1 Cr @ 34.32% (incl. cesses @ 4% and surcharge 10% on rate of tax)
(i) Taxable income between 1 and 2 Cr @ 35.88% (incl. cesses @ 4% and surcharge 15% on rate of tax)
(j) Taxable income between 2 and5 Cr @ 39.00% (incl. cesses @ 4% and surcharge 25% on rate of tax)
(k) Taxable income above 5 Cr @ 42.74% (incl. cesses @ 4% and surcharge 37% on rate of tax)
7. Expatriates versus Double Taxation Avoidance Agreement (DTAA)
(i) India has already entered into DTAAs (Tax treaties) with more than 90 countries to eliminate the impact of double taxation in the following situations:
(a) Where expatriates are tax residents of India and outside India (both).
(b) Where expatriates are tax residents outside India but deriving the incomes from India
(ii) Tax treaties are providing the solutions to avoid double taxation on incomes of the expatriates
(iii) Provisions of tax treaties or the ITA, 1961 are to be applied whichever are more beneficial to the expatriates
(iv) Expatriates are not required to pay tax in India where they have short stay in India
8. Tax Exemption for short physical stay in India
(i) Expatriates are not required to pay Income tax in India where their physical stays in India are short term. Hence taxable salary incomes of short physical stay are not taxable in India.
(ii) Generally expatriates are permitted to avail the benefit of short physical stay in 1st year only for their single or multiple visits.
(iii) Conditions for tax exemptions against short physical stay in India under section 10(6)(vi) of the ITA:
(a) Where foreign employer is not engaged in any trade or business in India and
(b) Where total physical stay of an expatriate in India is not exceeding 90 days in the previous financial year
and
(c) Where remuneration to an expatriate is not deductable against the income of the employer as chargeable to tax in India under ITA, 1961
and
(d) Where expatriate is having tax resident certificate (TRC) from the tax authorities outside India (country of resident of expatriate)
(iv) Conditions for exemptions against short physical stay in India under Dependent Personal Services through tax treaty between India and country outside India:
(a) Where remuneration is paid by or on behalf of a non-resident employer
and
(b) Where total physical stay is not-exceeding 182 days in India.
and
(c) Where remuneration is not paid by the Permanent Establishment (PE), taxable presence or fix base of the non-resident in India.
and
(c) Where expatriate is having tax resident certificate (TRC) from the tax authorities outside India (country of resident of expatriate)
9. Tax equalization and Hypothetical Tax
(i) Generally foreign employers are following a principle of tax equalization where a hypothetical tax is to be deducted by the employer in the home country from the salary and employer is making payment of tax on behalf of expatriates in India.
(ii) Hence expatriates are not making payment of tax in India where tax has already been deducted by the employer outside India.
10. Foreign Tax Credit (FTC)
(i) Expatriates are permitted to claim FTC against the tax to be paid in India based on source rules where tax has already been paid outside India based on residence rules to avoid double taxation on the same income
(ii) Tax treaties are specifically providing the provisions for elimination of the double taxation through allowing FTC in India against tax already paid outside India.
(iii) Expatriates are required to file Form No. 67 before filing of Income Tax Return (ITR) with the Income tax authorities to claim FTC in India.
11. Tax payments by the employers on behalf of expatriates
(i) Employers are required to deposit tax with the Income tax authority on behalf of the expatriates where employers have contract with the employees to pay tax on behalf of expatriates.
(ii) Employers are permitted to gross up of salary + tax. Hence employers are permitted to claim business expenses on salary + tax.
12. Withholding tax (TDS) against payment of salary to the expatriates
(i) Employers are required to correctly calculate and to deposit the tax on the salary against services rendered by the expatriates and to deposit the tax with the Income tax authorities.
(ii) Employer are required to pay penal interest, penalties and imprisonment for failure to deduct the TDS and also to deposit with the Income tax authorities in India
(iii) Central Board of Direct Taxes (CBDT) an apex body for tax administration in India issuing an annual circular between December to March every year to guide employers and employees (both) to understand about taxable salaries and amount of TDS. The CBDT had issued a circular no. 4 dated 15th March, 2022 for this purpose. This circular is providing certain regulations about:
(a) Rates of Income-tax for the relevant year
(b) Scheme of withholding tax on the salaries
(c) Persons / Employers responsible for deducting tax at source
(d) Computation of income under the head Salaries
(e) Permissible deductions while calculating taxable income
(f) Dos and Don’ts to obtain evidence or proof of claims
(g) Calculation of tax to be deducted
(h) Illustrations and Forms
(iv) The circular is also explaining about computation of tax under old system and new system of tax rates where an expatriate has option to use between old systems and new systems of tax rates.
13. Legal obligations for expatriates under the ITA, 1961
(i) Expatriates are required to obtain Permanent Account No (PAN) in India
(ii) Expatriates are required to prepare and to submit the ITR in India against the taxes as calculated, withheld and deposited by the employer with Indian tax authorities.
(iii) (a) Expatriates are required to obtain a tax clearance certificate (TCC) from the Indian tax authorities at the time of finally departing of the expatriates back to their home country after completion of their tenure in India.
(b) Expatriates are staying in India generally for a period between 3 and 5 years
(c) Expatriates are required to give an assurance to the Indian tax authorities through obtaining of the TCC that all taxes as payable have already been paid against the salaries as received by the expatriates during their stay in India.
14. Social Security for the expatriates in India
(i) Expatriates are getting social security in India through Provident Fund Regulations under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act).
(ii) (a) Expatriates are mandatory required to contribute the EPF Act, 1952.
(b) Expatriates are required to obtain a Certificate of Coverage (COC) from the social security authorities outside India to claim an exemption from mandatory contribution under the EPF Act, 1952.
(c) Exemption through COC is permitted under the head Social Security Agreement (SSA) as already has been signed between Govt. of India and Govt. outside India.
15. Receipt of salary by expatriates in home country
(i) Expatriates are permitted to receive part salary in India and part salary outside India.
(ii) The Reserve Bank of India (RBI) is permitting to the expatriates as deputed or seconded in India to receive 100% salary outside India when Income tax liability in accordance tax to the ITA, 1961 has already been deposited with the Income tax authorities in India.
16. Permanent Establishment (PE) through expatriates in India
(i) PE through expatriates in India is to be treated where physical presences of the expatriates are exceeding 6 months. Hence PE through expatriates in India is to be treated as PE for the parent companies as located outside India.
(ii) Parents companies as located outside India are required to pay tax on the profit as earned by the PE through the activities as performed by the expatriates in India.
(iii) Expatriate working for Indian subsidiary company of foreign holding company
(a) Indian subsidiary company is required to pay salary to expatriate and to deduct TDS where expatriate is 100% working for Indian subsidiary company and also under 100% supervision of Indian subsidiary company
(b) However establishment of PE in India is to be examined on case to case basis.
(iv) Indian subsidiary company is required to carefully analysis the actual activity performed between Indian subsidiary and parent company to compute proper share of profits in the transaction conducted through Indian subsidiary to avoid any attention by the Indian tax authorities for showing higher profits towards Indian subsidiary.
17. Transfer Pricing (TP)
(i) Expatriate’s secondment or deputation in India is also subject to the TP regulations under the ITA, 1961.
(ii) Hence cost sharing arrangement between the Indian subsidiary or branch office and parent company is to be computed based on Arm Length Principles (ALP).
B. Legal obligations for Foreign Citizens in India
1. Appointment and Remuneration
(i) Foreign Citizens are permitted for appointment as employee or technician, managing director, whole time director or director in India.
(ii) Foreign Citizens are permitted for remittances against remuneration, salary or fee as being direct current incomes under the head current account transactions
(iii) Appointment as Employee or Technician
(a) Foreign Citizens are permitted for appointment as employee or technician without restriction on the salary or fee
(b) Employers of the foreign citizens are permitted to remit directly the salary or fee after TDS without routing through the employee or technician bank accounts as maintained in India.
(c) Employers of the foreign citizens are permitted for incurring the expenses of the employee or technician on travelling and local hospitality in Indian Rupees (INR).
(iv) Appointment as Managing or Whole Time Director
(a) Foreign Citizens are permitted for appointment as managing or whole time director.
(b) Foreign Citizens are required to take approval from Ministry of Corporate Affairs (MCA) for appointment as managing or whole time director irrespective of the quantum of salary or fee.
(c) Employers of the foreign citizens are permitted for incurring the expenses of the employee or technician on travelling and local hospitality in Indian Rupees (INR).
(v) Appointment as Director
(a) Foreign Citizens are permitted for appointment as a director in Indian company without permission from the MCA.
(b) Foreign Citizens are permitted for receiving sitting fees in INR
(c) Companies of the foreign citizens are permitted for incurring the expenses of the employee or technician on travelling and local hospitality in Indian Rupees (INR).
2. Banking Facilities
(i) Foreign Citizens are permitted to open, hold and maintain the foreign currency accounts with the banks outside India
(ii) Foreign Citizens are also permitted to receive the salary or fee in the INR in their Indian accounts as maintained in India
(iii) Employers are permitted for 100% remittances outside India after TDS.
3. Remittance maximum USD 1 Million through NRO Account
- Foreign Citizens are permitted to remit maximum USD 1 million per financial year in the following circumstances:-
(i) When retired from an employment in India
(ii) When inherited the assets from a resident of India
(iii) When inherited in India by a widow of deceased husband
(iv) When completed his study or training in India
4. Approval from the RBI for Remittances Outside India
- Foreign Citizens are required to obtain an approval from the RBI for remittance in the following circumstances:-
(i) When remittances are exceeding USD 1 million per financial year
(ii) When remittances are to be made on the ground that hardship will be caused to foreign citizens if remittances are not made from India for the purpose as not covered under para 3 i to iv
5. Remittance to the Citizens of Nepal and Bhutan
(i) Foreign Citizens are not permitted for remittance to Nepal and Bhutan in foreign currencies
(ii) Hence Foreign Citizens are permitted for remittance to Nepal and Bhutan in INR only
6. Remittances against the sale of the Immovable Properties
- Foreign Citizens are not permitted for remittance against the sale proceeds of immovable property without permission from the RBI by the citizens of followings 8 countries:
(i) Citizens of Pakistan
(ii) Citizens of Bangladesh
(iii) Citizens of Sri Lanka
(iv) Citizens of China
(v) Citizens of Afghanistan
(vi) Citizens of Iran
(vii) Citizens of Nepal
(viii) Citizens of Bhutan
- Foreign citizens other than 8 countries are permitted for remittance against the sale proceeds of immovable without permission from the RBI through NRO account up to USD 1 million per financial year.
7. Remittances against sales of the Financial Assets
- Foreign Citizens are not permitted for remittance against the sales of the financial assets without permission from the RBI by citizens of followings 3 countries:
(i) Citizens of Pakistan
(ii) Citizens of Bangladesh
(iii) Citizens of Nepal
- Foreign citizens other than 3 countries are permitted for remittance against the sale proceeds of immovable without permission from the RBI through NRO account up to USD 1 million per financial year.
8. Acquisition of the Immovable Properties
(i) (a) Foreign Citizens are permitted to acquire immovable properties in India where residing for more than 182 days in preceding financial year for engaging in employment, carrying on business, vocation or any other purpose
and
(b) Also indicated their intension to stay in India for uncertain period
(ii) Henceforth both conditions are to be satisfied to make an eligible to become person resident of India under Section 2(V) of FEMA, 1999
(iii) Uncertain Period for stay in India by the foreign citizens to include the followings:-
(a) Where Foreign Citizens are staying in India for minimum 182 days in the preceding financial year
and
(b) Also Visa granted to him is clearly indicating his intention to stay in India for Uncertain period
(iv) Illegal Acquisition of the Immovable Properties
(a) Where Foreign Citizens are coming to India on the tourist Visa or other Visa
and
(b) Also not staying for minimum 182 days in the preceding financial year.
9. Opening of NRO Account by Foreign Citizen Tourists
(i) Foreign Citizen Tourists are permitted to open Non-Resident (Ordinary) Rupee (NRO)
(ii) However NRO account is permitted to open for maximum 6 months only
(iii) Foreign Citizens are required to have valid passport or any other valid proof for opening NRO account
(iv) Authorized dealer bank is required to follow KYC norms for opening NRO account
10. Eligible Credits in NRO Account by the Foreign Citizen Tourists
(i) Out of funds as remitted through banking channel from outside India or
(ii) Through sale of foreign exchange as brought from outside India
11. Eligible Debits in NRO Account by the Foreign Citizen Tourists
(i) Foreign Citizens are permitted to make local payments through NRO account
(ii) However Foreign Citizens are required to make local payments through account payee cheque or Draft where amount is exceeding INR 50
12. Remittances from NRO Account by Foreign Citizen as Tourists
(i) Foreign Citizen tourists are permitted to remit out of balance as available in NRO account
(ii) Foreign Citizen tourists are also permitted to convert in foreign exchange at the time of closing of NRO account
(iii) Restrictions on the remittances
(a) Where NRO account is maintained for more than 6 months
or
(b) Where local funds are credited other than interest accrued on NRO account
(c) Foreign Citizens tourists are required to take an approval from the RBI where restrictions are existed on the remittances as mentioned under para a and b
13. Opening of the Resident Rupee Account (RRA) by the Foreign Citizens
(i) Foreign Citizens are permitted to open and maintain a resident rupee account where they become residents of India under the section 2(V) of FEMA, 1999
(ii) Foreign Citizens are permitted to re-designate the NRO account at the time of leaving India after employment and to receive their legitimate dues subject to satisfaction of the following conditions:-
(iii) RRA is not permitted to continue until bona fides dues are received
(iv) Foreign Citizens are not permitted to remit exceeding USD 1 million per financial year
(Author can be reached at email address [email protected] or on Mobile No. 9811081957)
Disclaimer : The contents of this article are solely for informational purpose. Neither this article nor the informations as contained herein constitutes a contract or will form the basis of a contract. The material contained in this article does not constitute or substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this article to ensure its accuracy at the time of publication. Satish Agarwal assumes no responsibility for any error which despite all precautions may be found herein. We shall not be liable for direct, indirect or consequential damages if any arising out of or in any way connected with the use of this article or the informations as contained herein.
(Republished with Amendments)
Author Bio
Very good article with elaboration to cover the topic comprehensively.