NRI's (Non Resident
Indians) Work In United States, but Pay Tax In India
Mar 4th, 2005
Can you tax income which is otherwise not taxable
in India? Well, trust PC indian FM to find a way to
do that.
Normally, if employees are deputed to another country
for a long period of time, they do not pay any tax
in India on their salary income. Tax is payable by
them against their salary income, including perquisites
such as daily allowance, only in the other country
under tax treaty laws. In other words, no tax is captured
in India.
If the fringe benefit tax, as proposed in the Budget
, is enacted, PC will be able to fill the coffers
of the government treasury. India Inc will have to
cough up fringe benefit tax on perquisites such as
daily allowance paid to such employees. Thus, what
India could once not tax because of treaty laws in
the hands of the employee, will be captured indirectly
by a tax on the Indian employer.
Let us take a concrete example using the Indo-US
tax treaty as the base. Mr A is deputed by his employer
XYZ Ltd, an Indian company, to work on-site in California.
He has already spent more than three years in the
US and will be working on the current project for
over 183 days in the fiscal year. In short, Mr A is
a resident of the US for tax purposes.
To avail of a short-stay exemption, where Mr A pays
tax on his salary income only in India, three conditions
need to be met. He should be in the US for a period
of 183 days or less during a fiscal, the salary, including
perks should be paid only by the Indian company, such
salary should not be paid by a permanent establishment
(such as a branch) in the US of such Indian company.
In this case, all three conditions are not met. No
short stay exemption benefit is available and tax
is payable by Mr A against his salary income in the
US. Further, Mr A is a tax resident of the US and
a non-resident in India.
Thus, he does not have to pay any tax in India against
such salary income. Now, let us assume that Mr A gets
a basic salary of $6,000 and a daily allowance of
$3,000 per month.
XYZ Ltd will have to pay fringe benefit tax of 33.7%.
Of course, the value against which the tax will be
payable will differ from case to case. For instance,
if, of the $3,000 per month, $2,000 goes towards boarding
and lodging, then 20% of it would be the value for
computing fringe benefit tax. XYZ Ltd will have to
pay tax in India of 33.7% on $400, which works out
to a fringe benefit tax of $135 per month (or nearly
Rs 6,000 per month).
A quick glance at the per diem
allowance paid across the software sector shows that
the daily allowance hovers around $3,000 per month.
A major component of this is for boarding and lodging.
The ultimate fringe benefit tax payable by India Inc,
including the software sector on such daily allowances
could be a whopping figure.
Says Jairaj Purandare, senior partner, PricewaterhouseCoopers,
"It must be remembered that the fringe benefit
tax is not a tax on the employee but on the employer.
Thus, what could not be captured earlier as tax in
India, will be captured by taxing the employer."
He feels this proposal will lead to a host of litigation,
especially in a treaty scenario.
There could be another instance. Mr A could be a
resident of India for tax purposes. He has been deputed
to the US for a very short period of time. In this
case, it is likely that the perquisite paid to him
is taxable in his hands in India, both under the provisions
of the Indian tax laws and the Indo-US tax treaty.
Says VN Srinivasa Rao, partner, Ernst & Young,
"The fringe benefit tax does not take into consideration
the residency of the employee. If the perquisite paid
is one which falls into the categories defined as
a fringe benefit, India Inc would have to pay the
tax."
"But, the objective of this proposal is to bring
into the tax ambit only those benefits that have not
been captured in the hands of the employee. If Mr
A, a tax resident of India pays tax in India on these
benefits, as prescribed under Rule 3 of the Indian
Income-tax Rules, then company XYZ could argue that
it is not liable to pay fringe benefit tax,"
adds Mr Rao.
Both India Inc and international tax practitioners
are currently awaiting clarity on this issue.
Source-The Economic Times-Dated 4-3-2005-LUBNA
KABLY
