Budget 2020 Expectations: How FM Sitharaman can address tax woes of internationally mobile population

Updated: Jan 29, 2020 4:00 PM

Budget 2020 Expectations of Internationally Mobile Population: While Indian tax laws have been changing over the period, there are still some issues that need a closer look by the government to address the common woes of the internationally mobile population, covering both ‘expatriates’ and ‘outbounds’.

budget 2020, budget 2020 India, Budget 2020 Expectations of Internationally Mobile Population, expatriates, outbounds, FTC, DTAA, TDS, Double Taxation Avoidance AgreementBudget 2020 Expectations: Bringing in clarity/ amendment within the provision of ITA will help in reduced compliance not only for the mobile population, but also lead to reduced litigation and administrative compliance.

Budget 2020 Expectations of Internationally Mobile Population: In the current era of globalisation and a multinational environment, we are seeing not only foreign companies sending employees to India (popularly known as ‘expatriates’), but there has also been an upswing in Indian companies sending their employees overseas (popularly known as ‘outbounds’).

While Indian tax laws have been changing over the period, there are still some issues that need a closer look by the government to address the common woes of the internationally mobile population, covering both ‘expatriates’ and ‘outbounds’.

One of the proposition from a taxation perspective that can be brought in to ensure ease of tax compliance for the mobile population relates to claiming of Foreign Tax Credit (FTC) at the withholding stage. The current withholding provisions under the Income Tax Act, 1961 (ITA) does not specifically provide for claiming benefit of foreign taxes under the Double Taxation Avoidance Agreement (DTAA) at the time of deducting tax at source (TDS) in case of an individual. As a consequence, taxes are initially withheld and deposited on entire salary income for an outbound who is rendering services overseas and paid salary in India. Later a refund is claimed through tax returns by such individual since the salary paid overseas for a taxpayer qualifying as a Non-Resident or Resident but not Ordinarily Resident under Indian tax laws is not taxable in India.

Hence, there is a need to amend the existing withholding tax provisions to expressly provide that while calculating TDS at the time of payment of salary, benefit of FTC should be provided. The said amendment would reduce cash flow issue for expatriates and also administrative compliance burden for revenue authorities of issuing refunds with interest.

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Another issue that needs a relook is taxability of employee stock options. Presently, stock options are subject to tax at the time of allotment of shares, taxable value being excess of fair value of shares over the exercise price. In case of mobile employees who qualify as Non-resident (NR) or Resident but not ordinarily resident (RNOR) under the ITA, there is no specific provision under the law for prorate taxation with respect to days spent in India during the period of grant to vest. However, the said conclusion can be drawn based on the OECD commentary and various judicial precedents. Since the Act does not specifically provide for pro-rata taxation in respect of mobile employees, it leads to questioning by the revenue authorities for such category of employees. Therefore, it is suggested to have clarity on the same within the ITA.

Another ambiguity is in relation to credit for state taxes paid in the US. While there are judicial precedents allowing credit for state taxes, the issue remains open to dispute. In case of the US, the local governments at the provincial/ state/ cities, etc. also levy taxes on income. Though the levy of such local taxes on income also amounts to double taxation of income, the relief is denied by the tax authorities in India on grounds that such local taxes are not covered by the applicable tax treaty.

Bringing in clarity/ amendment within the provision of ITA will help in reduced compliance not only for the mobile population, but also lead to reduced litigation and administrative compliance. Hopefully, Budget 2020 will address these long-pending tasks of the internationally mobile population.

(By Divya Baweja, Partner, Deloitte India, with Divya Grover, Manager with Deloitte Haskin and Sells LLP)

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