Any person or persons residing temporarily or permanently in a country that is different from their home country or country of citizenship is referred to as an expat. Taxation of such expat employees involves a slightly different computation than the tax computed for a regular employee of an Indian organization.
Foreign expat in India
For any foreign expatriate working in India, the salary is deemed as earned in India if they are paid for services rendered in India. This is based on Section 9(1) (ii) of the Indian Income Tax Act. This rule is applicable irrespective of the resident status of the expat employee. Furthermore, the income earned is subject to tax deducted at source (TDS) irrespective of where the salary is actually credited. This means that even if the salary is credited in the home country of the expat employee, it is still subject to the Indian TDS.
In such cases, if salary is paid in foreign currency in the country of expat’s citizenship then such salary is converted into Indian Rupee (INR) and tax is calculated on total Indian currency value. Rate used to compute tax applicable is telegraphic transfer buying rate used by State Bank of India (SBI). Rate used is the rate on which tax is actually calculated on that respective day. This is based on Deduction of tax (Rule 26) section 192(6) of Indian Income Tax Act.
In case of foreign expats in India, actual tax burden is on Indian company where the expat has taken up a project or assignment and not on the expatriate himself or herself. For instance, when a US expat is sent to India, the Indian company will bear the burden of income tax. This in turn gives rise to the concept of grossing-up.
Tax grossing – up
When the foreign expat receives the salary, only the net salary after tax gets credited to his account. The Indian company where he has taken up the project will pay the tax applicable for his income earned. For instance, if net salary paid to the expat employee is INR 100 and tax paid by the company is INR 30 then total salary paid to the expat is INR 130. Total tax paid by the company will be computed on INR 130 and not on INR 100. This implies that an expat’s salary is calculated as the sum of net salary and tax liability on it. This is called grossing – up.
Tax computation for an expat’s salary
In India income tax rate is 30%. Over this 30% rate, 3% education cess is levied cumulating total income tax rate to 30.9%. Based on above example of INR 100 net income and INR 130 gross income the grossed – up tax calculations will be as follows: 30.9×100 / (100-30.9). Hence, total grossing up becomes 44.71%.
Double tax avoidance
In cases of such expatriates, there is always a chance of double taxation in each country where the employee is a resident and his / her worldwide income is taxable. In order to prevent such situation Central government of India under Section 90 of the Income Tax Act of 1961 has formed double taxation avoidance agreements (DTAA) with over 90 countries.
In cases where the income is earned in any country which is not on the list of DTAA and if tax has been paid in said country, then as per Section 91 he / she will be entitled to a deduction from income tax in India payable by the expatriate employee for a sum computed on the taxed income at the Indian rate of Income tax or tax in the country where the income is earned, whichever is lower.
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