In this era of globalization, employee mobility is an integral part of the way for various MNCs carry out their operations in different geographies. Such global employee movement casts additional responsibilities on the Employer as well as Employees to comply with the tax laws of both home and host jurisdiction. This would include both Indian employees who are increasingly taking up roles outside India and foreign employees heading to India to be part of the growth story here.
This is one set of taxpayers not many talk about, but these globally mobile employees contribute to the Indian economy in many direct and indirect ways and also play an important role as India's brand ambassadors. Though these employees may be part of a privileged set of individuals earning high salaries, it would be great if the government takes steps to recognize their contribution and address some of the issues faced by such employees and by extension, the employers.
After introduction of higher surcharge in the previous budget, the effective tax rates for high earning individuals has shot up widening the gap between the peak corporate tax rates vis-Ã -vis individual tax rate. This also makes India one of the countries with the higher peak tax rate for individual taxpayers, which acts as a dampener for highly skilled and experienced expats from considering India as destination of choice for employment opportunities. It also pushes highly educated Indians to seek employment opportunities in places such as Singapore and Hong Kong, which have much favorable tax rates.
The amendments brought in by the earlier budgets like re-introducing capital gain tax on equities/ equity mutual funds, tax on dividends, increase in rate of surcharge, etc., have all contributed to increasing the effective tax rates for such globally mobile employees. Hence, like other individual taxpayers, expatriates, including Indian origin expatriates, too hopes that an overall re-look at the tax slabs, tax rates, and surcharge is something which the Government has considered.
Apart from reducing tax rates, some of the other expectations of expatriate employees are:
LTA exemption for travel to Home Country
One of the expectation of expatriates from this budget is expanding the ambit of exemption for LTA to include travel to their home country. This component is usually included in their employment contract and is subject to tax. Since the expat's home country is outside India, hence, they may be allowed for the LTA exemption for journeys outside India as well. At present the exemption is allowed only for travel within India. Also, the frequency of such eligible visits may be increased from existing 2 journeys within a block of 4 calendar years to annual basis, with a cap on the quantum of expense that can be claimed as exempt.
Aligning the India tax year with other countries
Another aspect where expatriates would request the Finance Minister's attention is the fiscal year followed in India vis-Ã -vis calendar year followed by other countries. In fact, around 156 countries including World Bank follows a January-December financial year whereas India follows an April-March year. This results in practical challenges while meeting tax compliances in both host and home countries. For example, claiming foreign tax credit for doubly taxed income has been a tricky task due to the difference in financial year and the significant gap in due dates of filing of return in home and host country. Given the convergence of international business, it is time the government considers aligning India's financial year to the calendar year.
Taxability of ESOPs
Many MNCs have Employee Stock Option Plan (ESOP) as part of their compensation structure. Many of the expats who take up employment with group companies in India or Indians moving out to take up global roles are typically eligible for such ESOPs, which is liable to tax as a perquisite. In case of expats who serve part of the vesting period in India and qualify to be non-resident during the year of exercise of the option, only a proportionate amount of ESOP perquisite is considered taxable in India. Broadly, this is proportionate to the period of services rendered in India. However, if such expats qualify to be resident in India during the year of exercise, then the entire ESOP perquisite becomes taxable in India, irrespective of services rendered in India vis-Ã -vis total vesting period. This is on account of the fact that a resident is taxable on global income. Though a credit is available for any tax that may have been paid in the other jurisdiction, this results in complicated tax computations and cash loss. To avoid such hardships, the Government may consider laying down detailed provisions for ESOP taxability in the hands of expatriates.
Allowing Foreign tax credit (FTC) at withholding stage
Apart from the above, the expatriates also want to address the difficulty faced by them while claiming FTC at the stage of withholding of taxes by Indian employer. In one of the Authority for Advance Ruling (AAR) rulings, it was held that that credit of foreign taxes paid outside India can be claimed at withholding stage only. However, the same is practically challenging to implement, since the quarterly return filed by an Indian employer for the Tax Deduction at Source (TDS) does not specifically provide for considering the relief for foreign taxes. The only practical way of claiming such FTC is filing of Form 67 at the time of filing the return of income and then claiming a tax refund. This results in a timing difference with the employee being out of pocket till the refund is granted/ assessment is completed. It is hoped that the TDS provisions are amended to provide clear guidance for claiming TFC.
Pre-validation facility for bank accounts and tax refunds
Another tax compliance related challenge faced by the inbound expatriates (i.e. the expats coming to India) relates to claim of tax refunds by them. The taxpayers are entitled to receive the income-tax refund directly into their bank accounts only when their bank accounts are linked with their PAN. For this purpose, the taxpayers have to pre-validate their bank accounts on the online Income-tax portal. Many expatriates prefer to have their accounts with banks which have global presence like HSBC, City Bank etc., since transfer of funds from their India bank account to their home country bank account may be easier. However, the aforesaid banks are not listed for pre-validation facility on the Income-tax portal and thus, this has led to practical difficulty in getting the refunds issued to such taxpayers.
Also, in many cases the refunds are processed or issued after the expat leaves India. In such cases the Indian Bank account may have been closed or the Indian mobile number, which is linked to the e-filing account on the income-tax portal, is no longer valid. At present the tax department does not have any facility of remitting tax refunds to foreign bank accounts. Also, the e-filing portal does not have a provision for submitting foreign mobile numbers. It is interesting to note that the Employee Provident Organisation is now remitting the accumulated PF amounts for International Workers to their foreign bank accounts.
It is time for the tax department to follow suit and facilitate inclusion of foreign mobile number, increase the number of Banks eligible for the pre-validation facility and most importantly allowing remittance of tax refunds into foreign bank account.
Akhil Chandna, Director â€“ Grant Thornton India LLP with inputs from CA Pooja Lara and CA Garvit Agrawal