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Hello everyone today’s article is about taxation impact in India from all corners of law in case of people who are living in India and are working for Foreign Entity.

In the light of this pandemic, we are experiencing work from home (WFH) concept where people are employed with the entities outside entities and they work from their homes in India for those entities. This mainly happened because foreign countries have closed their borders and are not allowing anybody to enter their country. So, these people are forced to stay in India as they cannot go to those countries. This includes people who have Indian citizenship and have not visited India for past many years.

Since it has been almost a year these people are unaware of Indian Taxation and are facing difficulties to understand various aspects of Taxation in India. So, here we will try to help those people and cover each and every aspect from foreign company and Resident person point of view.

Let us understand this with a help of an example:

Suppose person A is a citizen of India and working as a technical consultant on payroll in Canadian Company XYZ Inc from past 5 years and have not visited India for more than 45 days. But due to the pandemic he has been living in India since April 2020 and working for XYZ. His total salary is Rs. 1,00,000 per month (Rs. 12,00,000 per annum). What will be the course of action for Company XYZ and the person A?

The above case has following clarification:

From Person A’s perspective

  • Residential status of the Individual:  

As per section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India and an individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:

1. If he is in India for a period of 182 days or more during the previous year; or

2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.

It is further clarified that where a person is already considered as a resident as per the basic conditions, then the above deeming provision will not apply.

Pursuant to the above new provisions, NR individuals who were eligible to claim benefits under the Act and under the Double Tax Avoidance Agreement between India and the country the individual is a resident of (subject to conditions being met), would now have to relook at such eligibility as he would qualify as an NOR in India.

For a person to be ordinary resident following conditions should be satisfied:

He should be present in India for more than 729 days (in aggregate) during preceding 7 Financial Years, and

He should be Resident in India for 2 or more Financial Years out of previous 10 Financial Years.

In the above case Person A in Resident and ordinary resident as he was outside India for only 5 Years, so he satisfies above condition. Moreover, Person A receives income in Indian Bank account his income will be chargeable to tax in India.

  • Income Tax:

Income of Person A can be taxable at normal provisions (At Slab Rate) or as per section 44ADA as he is providing technical consultancy.

Section 44ADA specifies that specified professional (Technical Consultant in this case) whose annual receipt is less than Rs. 50 Lacs can be taxed under the presumptive scheme of taxation where profits are presumed at 50% of the gross receipts.

Normal Provisions As per 44ADA
Total Income= Rs. 12,00,000 Total Income= Rs. 12,00,000
Net profit=Rs.12,00,000 Net Profit=Rs.12,00,000*50%= Rs.6,00,000
Tax- Up to Rs. 2,50,000= NIL

From Rs. 2,50,001 till Rs. 5,00,000= Rs. 12,500

From Rs. 5,00,001 till Rs. 10,00,000= Rs. 1,00,000

From Rs. 10,00,001 till Rs. 2,00,000= Rs. 60,000

Total Tax= Rs. 1,72,500.

Tax- Up to Rs. 2,50,000= NIL

From Rs. 2,50,001 till Rs. 5,00,000= Rs. 12,500

From Rs. 5,00,001 till Rs. 6,00,000= Rs. 20,000

Total Tax= Rs. 32,500.

In case of Person A, it will be beneficial for him to go for section 44ADA.

  • Tax Deducted at Source: TDS responsibility will be of company and Person A will not be responsible for deposit of TDS.
  • GST Liability: As per section 22(1) of CGST Act, every supplier shall be liable to be registered in the State or Union Territory (other than special category states) from where he makes supply of goods or services or both, if his aggregate turnover in a financial year exceeds Rs. 20 lakhs. In this case person does not have to require registration as his income from services does not increase Rs. 20 Lacs

What happens if it increases Rs.20 Lacs?

Export of services” means the supply of any service when, —

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

Export of service or goods has been classified as “Zero-rated supply” as defined under Section 16 of the IGST Act and if someone satisfy the conditions then he/she can export without IGST.

But registration is mandatory for the person.

If he had been employed as an employee in India by a permanent establishment of that foreign company then as per Schedule III of CGST Act, Services by an employee to the employer, in relation to his employment are exempt from GST and employee does not require registration. Since the foreign company will have a Permanent establishment in India then such entity will deduct TDS as per Section 192 of Income tax Act, 1961.

From Company XYZ Point of view:

TDS Liability: As per Sec 194C (1) provides that any person responsible for paying any sum to resident contractor for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and the following:

a) The Central Government or any State Government;

b) Any local authority;

c) Any corporation established by or under a Central, State or Provisional Act;

d) Any company;

e) Any co-operative society;

f) Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both;

g) Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India;

h) Any trust;

i) Any university or deemed university;

j) Any Government of a foreign State or a foreign enterprise or any association or body established outside India;

k) Any firm;

l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person, –

    • does not fall under any of the preceding sub-clauses; and
    • has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of professionduring the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;

Therefore, the above company XYZ needs to deduct TDS under section 194 C of Income Tax Act on payment to resident for Technical Consultancy. If there had not been any contract then Company XYZ can deduct TDS under section 194 J (Fees for Professional Services and Technical Consultancy) at the rate of 10%.

Let us now take a case where Foreign Company does not deduct TDS? What will be the course of action?

In such case section 228A of Income Tax Act, 1961 will come to force which states:

Where an agreement is entered into by the Central Government with the Government of any country outside India for recovery of income-tax under this Act and the corresponding law in force in that country and the Government of that country or any authority under that Government which is specified in this behalf in such agreement sends to the Board a certificate for the recovery of any tax due under such corresponding law from a person having any property in India, the Board may forward such certificate to any Tax Recovery Officer within whose jurisdiction such property is situated and thereupon such Tax Recovery Officer shall—

(a) proceed to recover the amount specified in the certificate in the manner in which he would proceed to recover the amount 25[specified in a certificate drawn up by him under section 222; and

(b) remit any sum so recovered by him to the Board after deducting his expenses in connection with the recovery proceedings.

26[(2) Where an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may, if the assessee has property in a country outside India (being a country with which the Central Government has entered into an agreement for the recovery of income-tax under this Act and the corresponding law in force in that country), forward to the Board a certificate drawn up by him under section 222 and the Board may take such action thereon as it may deem appropriate having regard to the terms of the agreement with such country.

Income Tax: There will be no Income Tax liability on Company XYZ as it has not earned any income in India. But if such entity has a Permanent Establishment in India the such income will be taxed in India.

Permanent Establishment is defined “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. There are certain establishments of PE which are:

  • Place of management
  • Branch
  • Office
  • Factory
  • Workshop
  • Mine, oil or gas, quarry or any other place of extraction of natural resources.

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April 2024