Working In India 042209
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Working In India 042209

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Ernst & Young have recently come out with a booklet that provides a summary of regulations, which may be of interest to expatriates coming to work in India ...

Ernst & Young have recently come out with a booklet that provides a summary of regulations, which may be of interest to expatriates coming to work in India

The fact sheets in "Working in India", have been designed to help expatriates understand India\'s tax and applicable regulatory provisions. Although this document provides a summary of issues, which may be of interest to expatriates coming to work in India, the information provided here should not be considered as a substitute for professional advice. On their arrival in India, the expatriates should seek professional guidance on tax implications, compliances and other relevant issues relating to the Indian assignment.

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Working In India 042209 Working In India 042209 Document Transcript

  • Working in India
  • Contents Introduction 3 Residency in India 4 Tax treatment of employee compensation 5 Income tax rates and tax compliance requirements 6 Social security 7 Wealth tax 8 Banking and remittance facilities for expatriates 9 Special remittance provisions 10 Visa and registration requirements for expatriates 11 PIO card and dual citizenship 12 Departure compliances 12 Personal baggage rules 13 Working in India 1
  • 2 Working in India
  • Introduction When you talk numbers, it is difficult to get bigger than this. India is the world’s largest democracy, with a population of more than 1 billion. From the Himalayas in the north to the Indian Ocean in the south, the Arabian Sea in the west to the Bay of Bengal in the east, the country is spread over 3.29 million square kilometer. People speak more than 844 languages, while 23 of them are official. They follow varied customs and even more diverse traditions. India is representative of different faiths and is the birthplace of Hinduism, Buddhism, Jainism and Sikhism. The country’s enduring institutions are rooted in the principles of democracy and justice. It’s a union of 28 federal states and 7 centrally administered union territories. The government is parliamentary, based on universal adult franchise. Similar to the British model, there are two houses — an upper house called the Rajya Sabha and the lower house called the Lok Sabha. The attached fact sheets have been designed to help expatriates understand India’s tax and applicable regulatory provisions. Although, this document provides a summary of issues, which may be of interest to expatriates coming to work in India, the information provided here should not be considered as a substitute for professional advice. On their arrival in India, the expatriates should seek professional guidance on tax implications, compliances and other relevant issues relating to the Indian assignment. The attached fact sheets are correct to the best of our knowledge and belief as on 16 April 2009. However, the fact sheets are intended as a general guide only. Specific advice should be sought before acting on information contained in the fact sheets. Working in India 3
  • Residency in India 1 An expatriate’s Indian income tax liability is inextricably linked to Under the rules of residence, an individual his residential status. According to the tax laws, an individual is considered to be a tax resident if he is present in India for: could be either a resident; or resident and not • 182 days or more in a tax year (Indian tax year extends from ordinarily resident; or non-resident. 1 April to 31 March), or • 60 days or more in a tax year and 365 days or more during the preceding 4 tax years If an individual does not satisfy both these additional conditions, he is classified as a ROR. A ROR is taxed on his worldwide The 60 days may be extended to 182 days in certain cases. income, whereas a RNOR and non-resident are taxed merely on The number of days for which an expatriate is physically present the income sourced in India or income received in India. in India in a particular tax year and in prior tax years determines Depending upon the residential status, the following income is his residential status in India for that year. subject to tax in India: Non-resident Income accruing/ Income Income received The above-mentioned conditions are termed as the basic Residential arising in India or accruing or deemed to be status deemed to accrue/ or arising conditions of residency. If neither of these two basic conditions received in India arise in India outside India are satisfied, the individual is classified as a non-resident (NR). NR P P Taking the classification further, there are two kinds of RNOR P P tax residents: ROR P P P • Resident and not ordinarily resident (RNOR); and • Resident and ordinarily resident (ROR) A resident individual who satisfies either of the additional Salary for services rendered in India is deemed to be India- conditions mentioned below, shall be classified as a RNOR: sourced income and hence, is taxable irrespective of where the salary is received and the expatriate’s residential status. • The individual has been a non-resident in India in 9 out of the However, a safe harbour may be available under the Indian tax preceding 10 tax years, or laws or the Double Tax Avoidance Agreement (DTAA) between • The individual has been in India for 729 days or less during India and the home country if certain conditions are satisfied. A the preceding 7 tax years DTAA will apply in case its provisions are more beneficial than the Indian Income tax laws. Typically, expatriates who are assigned to India for the first time would qualify as RNOR for the first 2-3 years of their stay The number of days for in India. which an expatriate is physically present in India in a particular tax year and in prior tax years determines the residential status in India for that year. 1. Income Tax Act, 1961 4 Working in India
  • Tax treatment of employee compensation All expatriates are taxed on any compensation received for Broadly, the taxability of the typical components of an expatriate services rendered in India. Compensation would include salary, compensation package is summarized below: fees, commissions, profits in lieu of or in addition to salary, advance salary, allowances and benefits in kind. Taxed on a Description Taxable on full amount Exempt from tax concessional value Base salary P All allowances other than those specifically considered below eg living allowance, P hardship allowance Bonus or commission/incentive P Housing allowance P Rent free accommodation P Furniture provided by employer P Temporary Accommodation on transfer P Utilities (electricity & water, servants) P Children’s education P Tax borne by employer* P Employer provided car with driver P (subject to FBT)** Reimbursement of specified relocation expenses P (subject to FBT)** Medical benefits P (subject to FBT)** Home leave travel P (subject to FBT)** Fringe benefits tax (FBT) • FBT will be payable on the difference between the Fair Market Value (FMV) of the securities on the date of vesting FBT is to be levied on the employer in respect of fringe benefits and the amount recovered from the employee. provided/deemed to be provided by the employer to his • For a company not listed on a recognized stock exchange employee(s). Such fringe benefits are generally not taxable in in India, the FMV would need to be certified by a Securities the hands of the employee. The provisions of FBT are equally and Exchange Board of India (SEBI) registered Category applicable to foreign companies if they have employees based 1 Merchant Banker in India. For a company listed on a in India. recognized stock exchange in India, the FMV will be linked to the market price of the securities. Stock incentive schemes2 • The amount subject to FBT will be considered as cost of Effective 1 April 2007, stock-based income has been brought acquisition for computing capital gains tax in the hands of under the ambit of FBT. The rules governing the taxation of such the employee at the time of sale of such securities. income are summarized below: • The employer can recover the FBT from the employees. • FBT will be levied on the employer with respect to any • The FBT so recovered from the employees, is deemed to allotment or transfer (directly or indirectly) of any specified be tax paid by the employee and may be eligible for credit securities or sweat equity shares to its employees (including overseas. However, the availability of credit needs to be any former employee or employees). confirmed by the home country. * A specific exemption is granted, subject to certain conditions, in respect of tax borne by the employer on non-monetary benefits provided to an employee. ** FBT — Fringe Benefits Tax — India had introduced FBT payable by employers on prescribed/deemed fringe benefits from the tax year 2005-06. However, for a company which is not liable to FBT, such benefits provided to the employees will be liable to tax in the hands of the employees as per the personal tax rules. Recently, the ambit of FBT has been widened to include Stock Based Incentive Schemes. 2. Income Tax Act, 1961 Working in India 5
  • Income tax rates and tax compliance requirements Indian tax law requires all employers to deduct tax when paying salary to their employees and deposit the same with the authorities within seven days from the last day of the month in which such payments are made. Any failure on the employer’s part to do this could attract stringent fines and penalties, in addition to the taxes not withheld. The tax rates for the year 2008-09 for an individual are mentioned below: Income slabs (INR) Income tax 0 – 150,000 Nil 150,000 – 300,000 10% of income in excess of INR150,000 300,000 – 500,000 INR15,000 plus 20% of income in excess of INR300,000 500,000 – upwards INR55,000 plus 30% of income in excess of INR500,000 A surcharge of 10% is levied on the income tax for individuals where total income exceeds INR1,000,000 in the tax year 2008-09. Further, an education cess of 3% is levied on the income tax including surcharge in the tax year 2008-09. For resident women, below the age of 65 years, the minimum income threshold is INR180,000. For senior citizens the minimum threshold is INR225,000. The tax laws offer relief to individuals in the form of certain deductions from their gross total income. These include investment in certain tax saving instruments, donations to charitable organizations etc. Every individual, whose income is liable to income tax in India, is required to file a personal return of income, within four months from the end of the tax year. Accordingly, the return of income for the tax year 2008-09 is required to be filed by 31 July 2009. Any delay in filing the return of income may attract interest and possible penalties. India follows a system similar to that of the UK’s “Pay as you earn” scheme where the employer is responsible for deducting taxes at source from salary payments made to employees. The expatriate is required to pay ”advance tax” on the income on which, tax is not withheld by the employer (typically personal income). The advance tax is payable in three installments due on or before 15 September, 15 December and 15 March each year. 6 Working in India
  • Social security Social security taxes/contribution3 e. Social Security Agreements have been signed with Belgium, France and Germany, but the date of “entry into force” is yet The Indian Provident Fund (Social Security) Scheme to be notified f. Every covered employer is required to contribute 24% (12% a. The Ministry of Labour and Employment has issued a each of the employer and employee’s share) of the employee’s notification extending the applicability of the Indian Provident monthly “pay” towards the Provident and Pension Fund. The Fund and Pension Scheme Rules to a new category of employer has an option to recover the employee’s share from employees called “international workers” the employee b. An international worker is defined as “an Indian employee g. Local employees drawing a monthly salary of INR6,500 or having worked or going to work in a foreign country with more are excluded from the purview of this legislation but this which India has entered a social security agreement and exclusion of the minimum pay does not apply to international being eligible to avail the benefits under a social security workers. Therefore, in case of international workers, the programme of that country, by virtue of the eligibility gained contributions to PF are required even if the “monthly pay” of or going to gain, under the said agreement; an employee, the employee exceeds INR6,500 other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the Contributions to foreign social security schemes act applied” There are no specific provisions for the taxability of c. A covered establishment is: overseas Social Security contributions made by the employer • An establishment employing 20 or more people engaged for the benefit of the foreign national. Specific analysis, basis in a specified industry or notified by the Central judicial precedents, is required to determine the taxability of Government from time to time such contributions. • Any establishment employing even less than 20 people can opt to be covered voluntarily under the Act d. Every covered employer will be required to make a contribution towards Provident and Pension Fund for international workers employed by it 3. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 Working in India 7
  • Wealth tax 4 Incidence of wealth tax Wealth tax is The incidence of wealth tax on an individual depends on both the residential status and the nationality. A person is taxable in India chargeable for on his global net wealth, if: • The individual is a ROR in India (as discussed earlier in this every year in document), and • He is an Indian national respect of net In all other cases, the individual is taxable in India only on assets located in India. wealth on the Rate of tax last date of the Wealth tax is calculated as 1% of net wealth, which exceeds INR1,500,000 on 31 March of a given tax year. tax year, at the Assets rate of 1% of the An individual’s ”wealth” includes: • Guest house, residential house or commercial building amount by which • Cars • Jewelry, bullion, gold and silver utensils net wealth exceeds • Yachts, boats and aircrafts • Urban land INR1,500,000 • Cash in excess of INR50,000 (bank fixed deposits are excluded) • Specific exemptions are available for some of these assets Wealth tax return The due date for filing the wealth tax return is 31 July, that is within four months from the end of the tax year (31 March). This is the same as the due date for filing the personal return of income. Wealth tax is chargeable for every year in respect of net wealth on the last date of the tax year, at the rate of 1% of the amount by which net wealth exceeds INR1,500,000. 4. Wealth Tax Act, 1957 8 Working in India
  • Banking and remittance facilities for expatriates 5 Under certain General Over the years, India has liberalized the regulations relating to circumstances, foreign exchange and remittance of funds from India. However, for certain specific remittances, prior approvals of the exchange expatriates can control authorities are still required. remit their entire Residence The definition of the term ”resident” as per the exchange salary received control regulations is different from the definition under the Income tax regulations. Therefore, although an individual may in India be a ”resident” as per the Income tax regulations, he may not necessarily be a ”resident” as per exchange control regulations. As per the exchange control regulations, a ”resident” means a person residing in India for more than 182 days during the course of the preceding financial year, but does not include a person who has come to or stays in India, in either case, otherwise than: • for or on taking up employment in India; or • for carrying on a business or vocation in India; or • for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period. In a nutshell, an individual would qualify as a non-resident in the first year of his arrival in India. From the second year onwards, the following factors shall determine his residency in accordance with the exchange control regulations: • Terms of employment • Nature of work • Duration of employment in India A person resident in India is required to take all reasonable steps to realize and repatriate into India all income accrued or due to him in foreign exchange, and such foreign exchange realized is required to be surrendered to an authorized banker in India within a prescribed time. Bank accounts and remittance provisions Foreign nationals can open bank accounts in India to credit their Indian earnings or receive funds from abroad to meet their normal living expenses. Under certain circumstances, expatriates can remit their entire salary received in India. 5. Foreign Exchange Management Act, 1999 Working in India 9
  • Special remittance provisions Under a liberalized remittance scheme A special remittance facility is provided to foreign nationals/ Indian citizens who are resident in India, being employees of a for resident individuals, which has foreign company on deputation to the office/branch/subsidiary/ been notified, total remittances of joint venture of such foreign company in India. Such employees have been permitted to open, hold and maintain a foreign up to USD200,000 per calendar currency bank account outside India and receive the salary from year are allowed for permissible the overseas employer in the account, for the services rendered current-account and permissible to the office/branch/subsidiary/joint venture in India, subject to the following conditions: capital-account transactions subject • the amount credited to such account does not exceed 75% of to certain exceptions. The scheme the salary accrued to or received from the foreign company, allows individuals to acquire and • the remaining salary is paid in rupees in India, hold immovable property or shares, • Indian income tax is paid on the entire salary, as applicable. maintain foreign-currency accounts or Apart from these, foreign nationals ”not permanently resident in India” (defined below) can repatriate out of India 100% of their other assets outside India without RBI net salary for maintenance of close relatives. A person qualifies approval, subject to the fulfilment of as ”not permanently resident” in India, if he is employed in India: specified conditions. • for a specified duration (irrespective of the length thereof), • or for a specific job or assignment (the duration of which does not exceed three years) For other residents this amount is limited to USD100,000 per recipient per year. A person may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when he was a non resident in India. 10 Working in India
  • Visa and registration requirements for expatriates The Foreign Exchange Regulations also permit the release of Foreign nationals can secure visas to enter India in the exchange for meeting expenses for medical treatment abroad applicable categories listed below: upon the estimate of a doctor in India or hospital/doctor abroad. Foreign Nationals coming to India for employment shall obtain an Employment visa from their home country. An Employment Nature of visa Purpose visa is initially issued for one year being subject to fulfilment of certain conditions. The visa can be extended in India for another Employment visa Persons intending to take up employment year or for the period of the employment contract, whichever is earlier. The accompanying family members should travel on an Business visa Visiting India on business visits Entry visa. Tourist visa Visiting India for tourism Generally, all foreign nationals holding a visa (other than a Tourist visa), which is valid for more than 180 days, must register with the Foreigners’ Regional Registration Office (FRRO) Student visa Pursuing studies/academic courses within 14 days from the date of arriving in India. However, Other purposes not covered elsewhere (including certain visas specify certain “specific endorsements” for Entry visa which, registration formalities are to be processed accordingly. accompanying families of foreign nationals) In cities, which do not have a FRRO office, expatriates must Persons of Indian Origin who have now obtained Long term visa register with the local police station. foreign nationality Persons interested in learning meditation or The documents typically required for FRRO registration are Yoga visa members of missionary organizations as under: • Copy of passport including Indian visa page Research visa Pursuit of research in any field • Two copies of the letter of recommendation on the letterhead of the Indian entity Transit visa Travelers passing through the country • Two copies of the letter of sponsorship on the letterhead of the Indian entity Missionary visa Missionaries of registered charitable trusts • Eight passport size photographs, colored or black and white Journalist visa Media representatives • Copy of the lease deed of individual’s residential accommodation in India or if residing in a hotel, a letter from the hotel Conference visa Event organizers and visitors A visa is required for all foreigners entering India Working in India 11
  • PIO card and dual Departure compliances citizenship A Person of Indian Origin (PIO) card can be obtained by any Before leaving the country, the foreign national, who is not expatriate who satisfies any of the following conditions: domiciled in India, is required to furnish an undertaking to the • The individual has held, at any time, an Indian passport, prescribed authority and obtain a No Objection Certificate if he is in India for business, professional or employment activities. Such • The individual or any of his parents, grandparents or great- undertaking must be obtained from the expatriate’s employer or grandparents were born in and permanently resident in India, the payer of the income. • The individual’s spouse is a citizen of India or a person of Indian origin. This implies that even a foreign spouse of a An exemption from obtaining the No Objection Certificate citizen of India or of a person of Indian origin may apply for a is granted to foreign tourists or individuals visiting India for PIO card. purposes other than business or employment, regardless of the number of days spent by them in India. PIO card holders are granted certain benefits such as: For an individual domiciled in India, his permanent account • The waiver of the requirement to obtain a visa to visit India, number, the purpose of the visit outside India and the • Exemption from the requirement of registration if the estimated time period for the stay outside India must be individual’s stay in India does not exceed 180 days, provided to the authorities. However, such individual may also • The acquisition, holding, transfer and disposal of immovable be required to obtain a No Objection Certificate in certain properties in India, and specified circumstances. • Facilities to obtain admission to educational institutions in India. The Indian parliament has passed a bill to allow persons of Indian origin who are also citizens of one of the 16 listed countries to acquire ”Overseas Citizenship” of India without surrendering the citizenship of the other country. The benefit of dual citizenship was recently extended to all persons of Indian origin who migrated from India after 26 January 1950. Overseas citizens of India will be entitled to certain rights and benefits, as prescribed by the central government. 12 Working in India
  • Personal baggage rules 6 An expatriate is eligible to import into India, bonafide baggage Furthermore, under the relevant rules, there are different (explained under the Customs Act) which includes personal/ exemption limits for baggage belonging to different classes of household effects (except certain specified items including, persons coming to India. The classification is based on age, alcoholic liquor/wines in excess of 2 liter, music system, duration of stay abroad, origin (Indian/foreign), country visited, color television, etc.) and jewelry up to specified limits, etc. This exemption cannot be pooled with any other passenger. free of customs duty. This is permitted on a bonafide If the value of the baggage exceeds the exemption limits, then transfer of residence, subject to the satisfaction of all of duty is calculated on the excess of such amount. the following conditions: Even though there is no condition for a minimum period of stay • The expatriate has lived abroad for a minimum period of in India for a passenger to avail of the concessions on transfer 2 years immediately preceding the date of his arrival in of residence, the benefit is available only in respect of bonafide India. Short visits made by the expatriate to India during baggage on a transfer of residence. Further, to avail this benefit, the aforesaid period of 2 years shall be ignored if the total generally, a declaration from the employer of the expatriate to duration of stay on these visits does not exceed 6 months the effect that his employment is being transferred to India is over the 2 year period. required to be submitted to the customs authorities. • The expatriate has not availed transfer of residence benefits in the preceding 3 years. General consideration The above conditions shall also apply to unaccompanied The goods imported by the expatriate should be accompanied baggage. In case of unaccompanied baggage, it is further by bills or invoices to facilitate their valuation to levy import required that the goods should have been in the possession of duty and to claim duty drawback on their subsequent the expatriate abroad and shipped within a month of his arrival re-export. At the time of arrival in India, the expatriate is to India. The goods may also be received in India up to a period also required to declare the following lists to the customs of two months prior to the arrival of the expatriate in India. authorities at the airport: Further, all goods imported as bonafide baggage in excess of • List of accompanying baggage specified limits (except motor vehicles, alcoholic drinks, goods • List of unaccompanied baggage imported through courier service) are classifiable under one heading and are liable to a single rate of effective customs duty of 36.05%. Certain specified goods imported as bonafide baggage (for example, VCR, washing machines, laptop, etc.) are exempt from the levy of customs duty in cases of bonafide transfer of residence or upon satisfaction of specified conditions. However, specified goods (e.g. TV, air conditioners, music systems, home theatre system, etc.) attract effective customs duty at a concessional rate of 15.45% ad valorem, subject to satisfaction of certain conditions. 6. Customs Act, 1962 Working in India 13
  • 14 Working in India
  • Useful websites to visit: • www.rbi.org.in — for Foreign Exchange and Control Regulations • www.mha.nic.in/fore_division.htm — for visa related Information • www.incredibleindia.org — for information on Indian tourism • www.timesofindia.indiatimes.com/ — for news updates around the globe • www.banknetindia.com/banklinks.htm — for Directory of Bank Websites • www.cbec.gov.in — for Baggage rules Working in India 15
  • Our offices Ahmedabad Kolkata 2nd Floor, Shivalik Ishaan 22, Camac Street Near CN Vidhyalaya, Block ‘C’, 3rd floor Ambawadi, Kolkata - 700 016 Ahmedabad - 380 015 Tel: + 91 33 6615 3400 Tel: + 91 79 6608 3800 Fax: + 91 33 2281 7750 Fax: + 91 79 6608 3900 Mumbai Bengaluru 6th floor & 18th floor Express Towers “UB City”, Canberra Block Nariman Point 12th & 13th floor Mumbai - 400 021 No.24, Vittal Mallya Road Tel: + 91 22 6657 9200 (6th floor) Bengaluru - 560 001 + 91 22 6665 5000 (18th floor) Tel: + 91 80 4027 5000, Fax: + 91 22 2287 6401 (6th floor) + 91 80 6727 5000 + 91 22 2282 6000 (18th floor) Fax: + 91 80 2210 6000 (12th floor) + 91 80 2224 0695 (13th floor) Jolly Makers Chambers II 15th floor, Nariman Point Chennai Mumbai - 400 021 TPL House, 2nd floor Tel: + 91 22 6749 8000 No 3, Cenotaph Road Fax: + 91 22 6749 8200 Teynampet Chennai - 600 018 Jalan Mill Compound Tel: + 91 44 4219 4400 95, Ganpatrao Kadam Marg Fax: + 91 44 2431 1450 Lower Parel, Mumbai - 400 013 Gurgaon Tel: + 91 22 4035 6300 Golf View Corporate Tower - B Fax: + 91 22 4035 6400 Near DLF Golf Course New Delhi Sector 42 6th floor, HT House Gurgaon – 122 002 18-20 Kasturba Gandhi Marg Tel: + 91 124 464 4000 New Delhi - 110 001 Fax: + 91 124 464 4050 Tel: + 91 11 4363 3000 Hyderabad Fax: + 91 11 4363 3200 205, 2nd floor Pune Ashoka Bhoopal Chambers C-401, 4th floor Sardar Patel Road Panchshil Tech Park Secunderabad - 500 003 Yerwada (Near Don Bosco School) Tel: + 91 40 6627 4000 Pune - 411 006 Fax: + 91 40 2789 8851 Tel: + 91 20 6601 6000 Fax: + 91 20 6601 5900 16 Working in India
  • Ernst & Young Pvt. Ltd. Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com/india Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young Private Limited is one of the Indian client serving member firms of Ernst & Young Global Limited. Ernst & Young Pvt. Ltd. is a company registered under the Companies Act, 1956 having its registered office at Block C, 3rd Floor, 22 Camac Street, Kolkata- 700016 © 2009 Ernst & Young Pvt. Ltd. All Rights Reserved. In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Ernst & Young Pvt. Ltd. accepts no responsibility for any loss arising from any action taken or not taken by anyone using this material. 0025.indd (India) 30/06. Artwork by Purnopoma Debnath.