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An individual is taxed in India on the basis of his/her residential status under the Income Tax Act of 1961 (the Act). Residential status, per the Act, is determined, inter alia, on the basis of physical presence of the individual in India during a particular financial year (April 1 to March 31).

Income tax

Residential status under the Act

An individual can be a resident and ordinarily resident (ROR), a resident but not ordinarily resident (NOR), or a non-resident (NR) for Indian tax purposes.

Taxability of income

Taxation varies based on the residency status of the individual in a financial year.

  • ROR – liable for tax on worldwide income
  • NOR – liable for tax on income sourced /deemed to source from India or received/deemed to be received in India, or from income derived from a business controlled or set up in India
  • NR – liable for tax only on income sourced /deemed to source from India or received/deemed to be received in India

Foreign nationals may be exempt from tax in India if their stay in India does not exceed 90 days, as prescribed in the Indian domestic law, or the number of days prescribed (generally 183 days) under various double taxation avoidance agreements (DTAA) into which India has entered with other countries, subject to satisfaction of all other conditions.

Definition of source

Salary for services rendered in India is deemed to accrue in India and hence, is taxable in India for all individuals, irrespective of the place of receipt and residential status, subject to benefit, if any, under the DTAA. Generally, services rendered are equated with physical presence in India. Salary entitlements paid for leave periods before or after services rendered in India, in line with an individual’s employment contract, are also deemed to have been earned for services rendered in India.

Tax trigger points

As mentioned above, salary for services rendered in India is taxable in India for all individuals. Further, salary received in India is taxable in India, irrespective of residential status of the individual and place of rendering services, subject to benefit, if any, under the DTAA/domestic tax laws of India.

Remuneration for services rendered by a foreign national, employed by a foreign enterprise during the individual’s stay in India, is exempt from tax in India if:

  • The total period of the stay in India does not exceed 90 days in a financial year
  • The foreign enterprise is not engaged in any trade or business in India
  • The remuneration is not liable to be deducted from the income of the employer chargeable in India

To the extent that the individual qualifies for relief in terms of the dependent personal services article of the applicable DTAA, there will be no tax liability. The DTAA exemption will not apply if the Indian entity is the individual’s economic employer. In addition, any salary or local benefits received in India are not eligible for relief under the DTAA. Additionally, subject to satisfaction of conditions, credit of taxes against juridical double taxation can be claimed under relevant Article of the DTAA / Indian tax law in the India tax return.

Tax Residency Certificate (TRC) has been mandated for claimingDTAA benefits while filing India tax return from financial year 2012-13. A taxpayer is required to produce a TRC issued by the Government of the respective country or specified territory in which such taxpayer is residentThe requirement of obtaining the TRC in the prescribed particulars has been done away with. In other words, the taxpayer can continue to obtain the TRC as issued by the foreign authorities. In case, the details prescribed in the domestic tax law are not reported in TRC issued by the foreign government, then the individual has to furnish the requisite details in Form 10F.

Further, recently FTC rules has been notified and are applicable from FY 2016-17. FTC rules provide for following set of documents for claiming FTC in the India Tax Return:

  1. Statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in a pre-prescribed Form No. 67 and verified in the manner specified therein;
  2. Certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assesse;
  3. From the tax authority of the country or specified territory outside India; or from the person responsible for deduction of such tax; or Signed by the assesse

Provided that the statement furnished by the assesse in 3 above shall be valid if it is accompanied by,-

  • An acknowledgement of online payment or bank counterfoil or challan for payment of tax where the payment has been made by the assesse;
  • Proof of deduction where the tax has been deducted at source

Types of taxable income

Individuals are taxable on income from one or more of the following categories:

  • Salaries
  • Income from house property
  • Profits and gains of a business or profession
  • Capital gains
  • Income from other sources

Income under each category is computed separately. The net result of all categories is aggregated to arrive at gross total income. Taxable income is determined by subtracting specified deductions from the gross total income. The benefits/amenities provided by employers to their employees are taxed as perquisites in line with the income tax rules.

Tax rates

Financial Year 2015-2016:

The maximum tax rate for the Financial Year 2015–2016 (01 April 2015 to 31 March 2016)continues to be 30 percent on income earned over and above INR1 million . Additionally, there is a levy of surcharge at the rate of 12 percent where the total income exceeds INR 10 million and education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000.

Further, there is tax rebate of up to INR 5,000 per annum or 100 percent of the tax, whichever is less, for resident individuals, with total taxable income up to INR 500,000 per annum.

Financial year 2016-2017

The maximum marginal tax rate for the financial year 2016–2017 (April 1, 2016 to March 31, 2017) continues to be 30 percent on income earned over and above INR 1 million. Additionally there is a levy of surcharge at the rate of 15 percent where the total income exceeds INR 10 million and education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000.

Further, there is tax rebate of up to INR 5,000 per annum or 100 percent of the tax, whichever is less, for resident individuals, with total taxable income up to INR 500,000 per annum.

Financial year 2017-2018 (as per proposed Finance Bill 2017):

The maximum marginal tax rate for the Financial Year 2017–2018 (April 1, 2017 to March 31, 2018) continues to be 30 percent on income earned over and above INR 1 million. Additionally, surcharge for individuals is applicable @ 10 percent on total income tax, if total taxable income is between INR 5 million to INR 10 million. Surcharge for individuals is applicable @ 15 percent on total income tax, if total taxable income exceeds INR 10 million. Marginal Relief is available.

Also education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000

Further, it is proposed under Finance Bill, 2017 that tax rebate of up to INR 2,500 per annum or 100 percent of the tax, whichever is lower will be available for resident individuals, with total taxable income up to INR 350,000 per annum for FY 2017-18 onwards.

It may be noted that the Finance Bill 2017 will go through all its Parliamentary stages in the coming weeks of March 2017. Once approved by both houses of the parliament and by the President of India, the legislation will come into force immediately.

Social security

Liability for social security

The Ministry of Labour and Employment, in a notification dated October 1, 2008, amended the “Employees Provident Funds Scheme, 1952,” and the “Employees’ Pension Scheme, 1995,” collectively referred to as the Indian Social Security Scheme. Accordingly, the scope of the Indian Social Security Scheme was extended to specifically include a new concept of “International Workers”(IWs).

IWs include expatriates working for an employer in India to which the Provident Fund Act applies and Indian employees who have contributed to the Social Security programme of a country that has a Social Security Agreement (SSA) with India and are eligible for benefits under these SSAs. Accordingly, all the expatriates holding foreign passports will qualify as IWs in India.

Consequently, all employees who fall within the definition of IWs are required to become members of the Schemes under the Provident Fund Act unless they qualify as ‘excluded employees’.

Recent amendment in PF and Pension Scheme

The Ministry of Labour and Employment, Government of India issued a notification providing that a Nepalese national and a Bhutanese national shall be deemed to be an Indian worker. This notification is effective from 2 November 2016.

IWs are excluded from contributing towards PF in India:

  • If they are contributing to social security in their country of origin; and obtained a Certificate of Coverage (COC) under the relevant SSA;

Or

  • Deputed from a country with which India has entered into a bilateral comprehensive economic agreement before 1 October 2008

Or

  • They are Nepalese national on account of Treaty of Peace and Friendship of 1950 and the worker who are Bhutanese national on account of India-Bhutan Friendship Treaty of 2007, shall be deemed to be Indian workers. (Date of effect: 2 November 2016) 

IWs (other than excluded employees) are required to contribute 12 percent of the specified salary (salary as defined under the EPF Act) towards Provident Fund in India. Employers are also required to contribute 12 percent of their employees’ specified salary to the scheme. A portion of employer’s contribution i.e. 8.33 percent of salary is mandatorily contributed into the pension scheme prior to 1 September 2014. . The contribution must be deposited on a monthly basis by the 15th of the subsequent month. Necessary forms and returns must be filed with the authorities within the prescribed timelines.

Amendments in the Employees’ Pension Scheme, 1995

  • As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014, the employee who is joining and becoming the member of the fund for the first time on or after 1st September 2014 and has salary exceeding INR 15,000 at the time of joining the fund is not eligible to become member of Employees’ Pension Scheme, 1995.
  • Therefore, the employer’s entire PF contribution of 12% will be contributed towards Provident Fund account and there will be no diversion of employer’s share to the Pension Fund.
  • Thus, all International Workers who would be becoming the member of the Provident Fund for the first time on or after 1st September 2014 and have salary exceeding INR 15,000 at the time of joining the fund are not eligible to become member of Employees’ Pension Scheme, 1995.

Amendments in the Employees' Deposit Linked Insurance Scheme, 1976

  • As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014; the wage ceiling has been enhanced from INR 6,500 to INR 15,000.
  • The contribution towards EDLI scheme and its administrative charges will be subject to a salary cap of INR 15,000 in case of International Workers.
  • The contribution must be deposited on a monthly basis by the 15th of the subsequent month. Necessary forms and returns must be filed with the authorities by the prescribed timelines.

Social Security Agreements

As on 1 January2017, India has signed Social Security Agreements (‘SSAs’) with 19 countries viz., Belgium, Germany, Switzerland, Denmark, Luxembourg, France, Korea, Netherlands, Hungary, Norway, Czech Republic, Sweden, Canada, Japan, Portugal, Finland Austria, Quebec and Australia. Out of the 19 countries, the countries with which India has SSAs which are currently effective are as follows:

Sr. No Name of the country Effective Date
1 Belgium 1 September 2009
2 Germany 1 October 2009
3 Switzerland 29 January 2011
4 Denmark 1 May 2011
5 Luxembourg 1 June 2011
6 France 1 July 2011
7 Korea 1 November 2011
8 Netherlands 1 December 2011
9 Hungary 1 April 2013
10 Sweden 1 August 2014
11 Finland 1 August 2014
12 Czech Republic 1 September 2014
13 Norway 1 January 2015
14 Austria 1 July 2015
15 Canada 1 August 2015
16 Australia 1 January 2016 
17 Japan 1 October 2016
18 Portugal 8 May 2017
19 Brazil Early 2018

Apart from these SSAs, other SSAs have not yet become effective/ operational.

Withdrawal of social security contribution 

Provident Fund accumulations

The IWs who are covered under an operational SSA between India and any other country can withdraw their accumulated PF balances on ceasing to be an employee in an establishment covered under the PF Act.

However, in case a person is not covered under SSA, he may withdraw the PF balance on retirement from service in the company at any time after 58 years of age or is faced with certain contingencies (death/ specified illnesses/ incapacitation).

Pension accumulations

In relation to pension withdrawal, the lump sum refund will be available only to those employees who are covered under an SSA in force and who have not completed the eligible service of 10 years even after including the totalisation of service under the respective SSAs. Employees not covered under an SSA will not get the lump sum refund.

In case of employees (both from SSA as well as Non-SSA countries) having 10 years or more contributory service, they would be qualified to receive a monthly pension.

Compliance obligations

Employee compliance obligations

Upon arrival in India for employment purposes, employee should apply in the prescribed form for allotment of a Permanent Account Number (PAN) which is the individual’s India tax registration number.

Individuals are liable to discharge tax by way of advance tax if the tax liability (net of taxes deducted at source) exceeds INR 10,000 in a particular financial year (per the due dates mentioned under the Act). Shortfall/delay in payment of advance tax will attract interest. From FY 2016-17, the advance tax payments should be made in four installments - 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.

Further, a resident senior citizen, not having any income from a business or profession, shall not be liable to pay advance tax.

As per the recent amendment, the mandatory declaration needs to be provided by employee to employer for all the deduction / benefits to be claimed against the salary income (for e.g. Leave Travel Allowance, House Rent Allowance, etc.) in Form 12BB.As per the domestic tax law in India, every individual, whose income exceeds the maximum annual amount not chargeable to tax, is required to file annual return of income for the respective financial year with the Indian-tax authorities by 31 July following the financial year end.

Extensions of the filing deadline are not permitted. Where a taxpayer files a return after the due date, interest is levied at 1 percent per month (or part thereof) for each month of delay on the balance tax payable. Finance Bill, 2017 has proposed a levy of late filing fee ranging from INR 1000 to INR 10,000 in case of tax returns filed after the due date.

The rate of penalty is 50 per cent of tax for under-reporting of income and 200 per cent of tax for mis-reporting of income
Further, from FY 2012-13, it is mandatory for individual to e-file (electronically) the return of income, if total income exceeds INR 5,00,000 and for every person claiming tax relief under Section 90, 90A or 91 (Treaty benefits).

Further, every resident having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India would be mandatorily required to furnish a return of income irrespective of the fact whether the resident taxpayer has taxable income or not.

Furthermore, from FY 2016-17, filing of a return of income is mandatory in respect of taxpayers with exempt long-term capital gain arising from equity shares / equity-oriented mutual funds where such exempt income and other income exceeds applicable tax threshold limit.

All employees are required to obtain a no objection certificate from the Indian tax authorities at the time of leaving India.

Employer compliance obligations

As per the domestic tax law in India, any person responsible for payment of salary is required to obtain Tax Deduction Account Number (TAN) and withhold tax at appropriate rates on salary paid to the employees.
Further, the tax deducted must be deposited with the central government within seven days from the end of the month of deducting the tax (for the month of March the tax needs to be deposited by 7th April, in case where taxes on non-monetary benefits are borne by employer or 30 April in other cases).

A certificate (namely Form No. 16 and Form 12BA) must be issued to the employee for the tax deducted within two months from the end of the financial year. The employer also must submit on a quarterly basis within prescribed statutory timelines (i.e. 31 July, 31 October, 31 January and 31 May), a return of tax deducted at source with the tax authority.

Immigration

Immigration Updates

To boost tourism in India, the Government of India has made positive changes in the original Tourist Visa on Arrival (TVoA) scheme which was introduced in 2010. This facility is only available for Japanese nationals at present.. E-tourist visa facility is available for more than 150 countries. Refer the link here.

The Government of India recently promulgated an ordinance to the Citizenship Act, 1955 merging the Overseas Citizenship of India (OCI) and Person of Indian Origin (PIO) schemes and thereby fulfilling their earlier promise.

Under the new scheme, no further PIO cards shall be issued. Existing PIO card holders will enjoy the same benefits as that of OCI card holders. Individuals who were earlier eligible only for a PIO card may now be eligible for an OCI card. Conversion of PIO Card to OCI date is extended till 30 June 2017.

Work permit/visa requirements

A visa must be applied for before the individual enters India. The type of visa required will depend on the purpose of the individual’s entry into India. Every foreign national arriving on a E visa, Entry Visa, Research visa, Conference visa, Medical visa and Business visa that is valid for more than 180 days in India must ensure that the individual is registered with the Foreigners Regional Registration Officer within 14 days of arrival in the city in which the individual lives.

The Ministry of Home Affairs (MHA) has issued certain “frequently asked questions” on work-related visas being issued in India clarifying the purpose, duration, and various scenarios under which business and/or employment visas may be granted to foreign nationals.

Further, the government of India has mandated that an employment visa may be granted to a foreign national only if the individual’s salary is in excess of USD 25,000 per annum. However, the threshold salary limit is not applicable to ethnic cooks, language (other than English) teachers/translators, and staff working for a high commission/consulate in India.

Other issues

Double taxation treaties

In addition to India’s domestic arrangements that provide relief from international double taxation, India has entered into double taxation treaties with more than 100 countries (comprehensive and limited) to prevent double taxation and allow cooperation between India and overseas tax authorities in enforcing their respective tax laws.

Permanent establishment implications

There is a likelihood that there could be Permanent Establishment exposure, for overseas company in India (due to presence of secondees in India) and this may need a separate examination from corporate tax perspective.

Wealth tax/indirect tax

Wealth Tax has been abolished from the tax year 2015-16 onwards.

In addition, customs duty is payable on certain specified goods brought into India, and other indirect taxes, such as value-added tax (VAT)/sales tax, expenditure tax, and service tax, are payable on purchases of goods and services.

Goods and Service Tax (GST)

GST - a comprehensive consumption based levy of tax on supply of goods and services which is proposed to be implemented in India. On implementation of the GST legislation, a number of present Indirect taxes would be subsumed such as Central Excise, Service tax, Octroi, Central Sales Tax, State-level sales tax, Entry tax, Luxury tax, Entertainment tax, etc., and would be replaced by single good and Service Tax. This could ensure uniformity of Indirect tax structure and rates across States in India and could also ensure better controls by Central and State Governments.

Also, one of the key feature of the GST legislation would be to avoid cascading effect of Indirect taxes by allowing a seamless credit of tax throughout the value chain across India. The GST regime further proposes to have a comprehensive compliance modules, the foundation of which would be based on a robust IT system.

The Government is taking various steps and seems to be course to implement the GST legislation from proposed date of 1 July 2017.

Transfer pricing

The Indian Transfer Pricing Regulations were introduced in 2001 and are largely in line with the Organisation for Economic Co-operation and Development (OECD) Guidelines. Since their introduction in 2001, the Indian Transfer Pricing Regulations have come of age — both in terms of quality of audits as well as the revenue generated for the Indian government. Further, over the past few years, there has been significant guidance from Income Tax Tribunals and higher Appellate Authorities on various fundamental transfer pricing issues across industries.

The Indian Transfer Pricing Regulations extend to international as well as domestic transactions between associated enterprises. The Regulations have been developing over the years and now also aim to cover: debts arising during course of business; business reorganizations or restructuring (included irrespective of whether the same has an impact on current year’s profits, income, losses or assets); and intangible properties including marketing intangibles, human assets or technology related intangibles, etc. The introduction of the Advance Pricing Agreement (APA) program in 2012 has been followed by the introduction of APA rollback regulations in 2015. All taxpayers who have filed for APAs to date will also be eligible to file for rollback of their APAs up to a maximum period of four prior years, subject to certain conditions. Even those taxpayers who have signed APAs with the government will also be eligible for APA rollbacks. However, it is important to note that before availing of a rollback of APA terms, the taxpayers and the Revenue authorities need to withdraw any pending litigation.

OECD-BEPS initiative India has been actively involved in various action points of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan, and is engaging closely with other G20 member countries in respect of the BEPS initiative. India is also part of the BEPS Bureau, which is coordinating and guiding the work being done in all areas, and will seek to implement the guidelines issued by OECD from time to time under the BEPS initiative. Indian transfer pricing authorities have already been adopting the OECD’s approach on BEPS in relation to intangible-related returns and concurs that such returns should reside with the entity which makes strategic decisions around creation of the intangibles, and not with the entity which has mere ownership of title and funding capacity. India therefore believes that by adopting the ‘‘significant people functions’’ approach in determining the economic owner of intangibles, the disconnect between profit and economic activity will be significantly resolved.

In respect of the OECD’s guidance on transfer pricing documentation and Country-by-Country (CbyC) reporting, the Indian Revenue authorities are of the view that the proposed three tier structure (i.e. master file, local file, and CbyC report) would assist in making proper risk assessments and identifying cases where transfer pricing audits are required.

Local data privacy requirement

There is no separate Local Data Privacy Act. However, the same forms part of Information Technology Act. Further, there is internal data privacy policy within the firm.

Exchange control

Per the Exchange Control Regulations, a foreign citizen resident in India or an Indian citizen employed by a foreign company having an office/branch/subsidiary/joint venture/group company in India may open, hold, and maintain a foreign currency account with the bank outside India and receive the whole salary payable to the individual in that account provided that income tax is paid on the salary accrued in India.

A foreign citizen resident in India employed with an Indian company can open, hold, and maintain a foreign currency account with a bank outside India and can remit the whole salary received in India to such an account overseas provided the income tax is paid on the entire salary in India.

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