Are you thinking about sending your employees on assignments to India? Are you wondering about the taxes they may have to pay during their stay in India? Are you worried that you will be paying taxes in the country of origin as well as in country of employment (India) as a sending company? We answer all these questions in this short article.
Is the expat a 'resident'?
You must first understand the residence status of an expat. Since you earn income in India, you are a taxpayer in the eyes of the Indian tax authorities. Read more about this in 'Expat taxes in India'.
The basic exemption limit is Rs.2.5 lacs (around 3000 euros). Above you are liable to pay taxes.
To be able to file taxes, the expat must have a PAN card. PAN stands for 'Permanent Account Number' and is meant as an identity number for the Indian tax authorities.
Employed abroad, should you pay taxes in India?
The expat remains employed and paid by the employer in the country of origin. What is the consequence of this for the taxes to be paid by this expat? This construction is easy to set up because nothing else changes than the place of employment. The challenge here, however, is the risk of violating India's payroll laws. Compliance with payroll laws is very important here because India is the place of employment during the assignment.
Shadow payroll before taxes
Employers can for example use shadow payroll. Shadow payroll is used to report and pay taxes for an expat's country of employement while he or she remains on the payroll of the country of origin. Because the expat will remain on a Dutch payroll, however, you do not want a traditional payroll in India, because you do not want to pay the expat twice.
In this case, the Indian company would report the expat's income to local tax and social security authorities as if it were the payrolling employer, and then this company would do intercompany transaction behind the scenes for each payroll period with the company in the country of origin. The foreign company therefore pays tax for the expat in both the country of origin and India (country of employement).
How does shadow payroll work?
In order to carry out the shadow payroll, the amount of the tax due is calculated according to Indian law on the basis of the income (including any non-salary benefits received by the expatriate from the foreign company, such as any additional allowances received by the expatriate to the tax burden resulting from the assignment). The foriegn company then uses the shadow payroll as a way to report and pay taxes through the company in India, but not to pay the expatriate.
Tax treaties with India
So, since the foreign company that is sending the expat to India, is paying taxes on behalf of the expat, in both the county of origin and country of employement, the tax burden can be too high. How does this company reduce its tax burden? The expat is also tax resident in the foreign country.
There's a good news. India has entered into the DTAA (Double Taxation Avoidance Agreement) with many countries. This means that the expat may claim tax relief when filing his income tax return. In general, the employer will reclaim the taxes due from the employee if a foreign tax credit claim is made at the end of the year.
In addition, if India also has a social security agreement with the respective foreign country, the expat will not be required to pay Indian social security if their assignment is for less than five years. However, the tax treaty will not protect them from exposure to Indian income taxes if the assignment lasts more than six months.
Get in touch with Miss Legal India to know more.