Budget 2018: The launch of ‘Make in India’ campaign and other similar initiatives have further elevated India as an investment destination for multinational companies (MNCs). In order to support the initial set up of business in India and to protect their equity interests, MNCs second their employees (hereinafter referred to as ‘expatriates’) to their joint venture (JV) partners or wholly-owned subsidiaries in India. These secondment may range for a period of three months to three years.
The current Income-Tax Act, 1961 (‘the Act’) does not contain any specific provision dealing with taxation of expatriates, except providing for a short stay exemption to foreign citizens upon fulfillment of certain conditions. Apart from exemptions relating to initial relocation expenses, there are no specific exemptions enjoyed by the expatriates in connection with the unavoidable expenses incurred by them. The tax positions are taken in light of various judicial pronouncements and the same are always prone to litigation. Such absence of exemptions and the possibility of litigation becomes worrisome for both employers and employees coupled with a fact that they may be liable to tax in two countries.
A pro-active approach by Finance Minister Arun Jaitley and the Modi government in the Budget 2018 would be a very positive step which would result in an upsurge in the expats’ index in India. There is a need to review extant tax laws in order to bring an element of discipline and transparency in the current commotion. Some of the expectations from the upcoming Union Budget 2018 in this relation are listed below:
Travel to home country
Normally, an expat is provided with to and fro flight tickets to home country (at least once or twice in a year) by his employer during the period of his assignment. However, such travel costs borne by the employer, directly or indirectly, are taxable as perquisite in the hands of the employee if incurred for personal visit, although such personal visit is a necessity and there is no benefit actually derived by the employee.
As per the current law, leave travel allowance (LTA) to the extent of travel expenditure incurred by an employee is exempt only in respect of his/ her travel to a place in India. It does not cover international travel. FM Arun Jaitley should consider extending this exemption to international travel also and should not apply restriction of two travels within a block of four years to expats traveling to their home country.
Watch Video: Make In India A slogan. Interest Rates Should Have Been Lower By 100-150 bps
90 days’ rule for ‘short stay exemption’
As per the I-T Act, salary received by a foreign citizen is exempt from tax i.e. he/she is granted short stay exemption, if his/her stay in India does not exceed 90 days in any tax year, subject to satisfaction of certain conditions. Most of the Double Taxation Avoidance Agreements (DTAA) that India has signed provide for a threshold limit of 183 days.
Accordingly, FM Arun Jaitley should in the Budget 2018 consider aligning the limit of 90 days to 183 days in accordance with various DTAAs. This will be helpful for foreign citizens coming from countries with whom India doesn’t have DTAA in place.
Taxability of ESOP
Under the current law, there are no specific provisions governing the taxability of ESOPs in case of mobile employees. As per the tax laws in India, ESOP is taxed as a perquisite in the hands of employee at the time of exercise of options.
In case of expats, ESOPs may have been granted much before their visit to India, however, the exercise could happen during their stint in India. In respect of expats who have served part of the vesting period in India and become a non-resident during the year of exercise, only the proportionate amount to the period of services rendered in India vis-à-vis total vesting period would be taxable in India. However, in case of expats qualifying as ordinarily residents during the year of exercise, then the entire amount arising from ESOPs would be taxable in India irrespective of services rendered by an expat in India.
In order to avoid such kinds of disparity, detailed provisions in the I-T Act in respect of ESOP taxation in case of mobile employees would be a welcome move.
Provident Fund (PF) withdrawal
At present, international workers are liable to contribute to PF irrespective of the amount of salary earned by them. As per the IT Act, withdrawal of PF is exempt only if the employee has rendered continuous service of five years or more. Generally, expats are seconded for a period of less than three years, which means that the entire contributions (along with interest) would be taxable on withdrawal and this makes PF painful for both employers and expats. Hence, Finance Minister Arun Jaitley in the Union Budget 2018 should consider removing the condition of five years for international workers, which would be a big relief for both employers and international workers.
Expectations enumerated above will be welcomed by both MNCs and expat community and further boost the movement of expat population in India.
(The author is National Leader Tax, Grant Thornton India LLP. With inputs from Nilpa Keval Gosrani)