Taxing times: Nasscom pitches for totalisation deal with US, UK

Ashu Kumar and Rajeev Jayaswal in New Delhi

National Association of Software and Service companies (NASSCOM) has decided to step up its efforts to help the Government of India signing Totalisation Agreements with the Governments of US and UK.
The recession ridden Indian software industry which earns the majority of its revenues from US and UK can get substantial relief if these two countries enter into a Totalisation agreement
with India.

Currently, the India software companies executing projects in US are paying more than 20 per cent of their on-site manpower wages as social security taxes. Similar taxes are also paid in UK under National Insurance (NI) scheme. The Totalisation agreement will save the Indian companies from paying these taxes.

According to Nasscom president Kiran Karnik, Nasscom is working in close coordination with the Government of India to convince the US administration on the need to sign a Totalisation Agreement with India.

“A NASSCOM delegation has already met Social Security Administration officials in USA in this regard. NASSCOM is also assisting in preparing a draft Totalisation agreement that can be signed with these countries,” said Mr Karnik. On the UK side, a few individual companies have already raised this issue with the UK government. NASSCOM will also take this up during its visit to UK for the India-Europe IT Summit in October this year, he added.

All employers in USA and UK are liable to pay these taxes which are essentially taxes on employment, similar to the Indian laws of Provident Fund (PF). The objective is to provide for the employee’s old age, sickness and disability etc. In US, social security taxes are to the tune of 21.5 per cent of the wages.

The rule, which is applied to short term and contract workers also, forces the Indian companies to pay these taxes for their onsite employees. However, Indian employees hardly get any benefit of these schemes as they work on overseas projects for a short period and come back to India. Under normal circumstances, people would be able to claim benefits under these scheme once they cross the age limit of 62.

The Totalisation agreements provide that an individual be covered under the social security system of only one country, usually the home country. Since the employees of Indian companies are already covered in India under various social security schemes like the Employees Provident Fund Act (PF and PPF), Employees State Insurance Scheme (ESI), Super-annuation and Pension Schemes of these companies, these employees need not be again brought under the US Social Security Acts especially since they will be ineligible for availing of any social security benefits.

Some of the european countries like Belgium and Germany have already exempted several Indian companies from contributing to their social security system similar to the NI Scheme in the UK. Singapore also has a general exemption from social security contributions for non-residents.

Most of the European countries doing business in the United States, like UK, France, Germany, Austria do not pay any social security taxes in the US because they have signed Totalisation Agreements with the US government.

The United States has such agreements with Austria, Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Korea (South), Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. An agreement with Chile has been signed and is expected to enter into force soon.
The Social Security Administration, USA is now planning its negotiating schedule for new agreements, and NASSCOM and the Indian government are now working towards including India in this list, said Mr Karnik.