No tax on expats for work unrelated to India

March, 09th 2009

Tax liability of expatriate employees responsible for operations of a company in India as well as other countries in the region could go down substantially with a tax tribunal ruling that they need not pay tax on salary earned outside India for work unrelated to Indian operations.

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that if the expat employee is able to substantiate that he has not performed any activity relating to Indian operations while working outside India, the salary for those days would not be taxable here.

“Based on this ruling a position could be taken that individual is not taxable for the period for which he has rendered service outside India. But, the documentary evidence would be critical for taking this position,” said Vikas Vasal, executive director (tax and regulatory services ), KPMG.

The Income Tax Appellate Tribunal ruling relates to a case pertaining to Ellis D’ Rozario, an expat employee of Dubai-based Master Foods Middle East FZE. The company had posted Mr Rozario, an Australian national, as regional manager for the Indian sub-continent at its New Delhi liaison office.

According to the employment contract between Mr Rozario and the company, he had to travel outside the country to look after the regional operations, a common practice followed by most multinational companies. The expat was a ‘resident but not ordinarily resident’ for the relevant tax year 2000-01.

According to the Income Tax Act, an individual is a resident in a previous year (the year for which tax liability is being calculated) if he has been in India during that year for 182 days or more. He is also treated as a resident if he is in India for 60 days or more in a year provided that he has also been in India for 365 days or more in the preceding four years.

The income-tax department contended that the salary received during Mr Rozario’s visits outside India was liable to tax, as he also took updates or debriefs in respect of the Indian operations during the visit. Moreover, according to the employment contract, the expat was based in India, from where he rendered services to the company.

This was disputed by the taxpayer saying that the services performed outside India were unrelated to the Indian operations of the company and thus not liable to tax.

However, since the expatriate employee had not submitted any documentary evidence in respect of work done outside India for regional operations, the tribunal restored the matter to tax authorities for determining it.