Salary of foreign employees in India - Taxability

An Individual who is not citizen of India or a person of Indian origin may become resident in India only in one of the following situations: -

(i)   if he stays during previous year 2020-21 for 182 days or more; or

(ii)  if he stays during the previous year 2020-21 for 60 days or more and also stays for 365 days or more in preceding four previous years.

Thus, generally, a person will become resident in India for the previous year 2020-21 only if he stayed in India for 182 days or more unless he is covered by the exceptions discussed above.

Salary or Remuneration for services rendered by a foreign national, employed by a foreign enterprise during the individual’s stay in India, is exempt from tax in India if:

(a)     the total period of the stay in India does not exceed 90 days in a financial year

(b)     the foreign enterprise is not engaged in any trade or business in India

(c)     the remuneration is not liable to be deducted from the income of the employer chargeable in India

The Board vide Circular No. 685, dated June 17, 1994 has clarified that all payments and perquisites to employees for services rendered in India are taxable in India, irrespective of the place where the payment is made and that the employers are liable to deduct tax at source even in respect of payment of salary, allowances and perquisites paid or provided abroad to their employees who have rendered service in India.

The Board's circular clearly states the legal position about the taxability of the salaries earned in India by virtue of section 9(1)(ii) of the Income-tax Act, 1961. There cannot be any dispute about its legality and validity. According to section 9(1)(ii), income which falls under the head 'Salaries', if it is earned in India, is deemed to accrue or arise in India. For that purpose, income of the nature of salary payable for services rendered in India, is regarded as income earned in India 

Board's  Circular  No. 685, dated 17.06.1994

Subject : Non-initiation of penalty and prosecution proceedings in certain cases of defaulters under Chapter XVII-B

It has come to the notice of the Board that some of the employ­ers, including foreign companies operating in India, have been defaulting in deducting tax at source as required under section 192, on the salaries and allowances paid abroad, or perquisites provided abroad, to their employees for services rendered in India. In some cases, tax might have been deducted at source, but not remitted to Government. All payments and perquisites to employees for services rendered in India are taxable in India irrespective of the place where the payment occurs. The employers are, therefore, liable to deduct tax at source even on payment of salary, allowances and perquisites paid or provided abroad to their employees who have rendered service in India. They are also required to remit such deducted tax to Government. Failure to comply with these requirements would render the employer an assessee in default, and would attract interest under section 201(1A). Penalties under sections 221 (assessee in default) and 271C (failure to deduct tax) are then leviable and prosecution proceedings under section 276B can also be initiated in such cases.

2. To encourage immediate voluntary compliance, the Board has decided that proceedings under sections 221 and 271C for levy of penalties and proceedings under section 276B for prosecution need not be initiated in cases where an employer voluntarily comes forward and pays the whole of the tax due under section 192, along with interest liability under section 201(1A) on or before July 31, 1994.

3. Employers (Indian and foreign), who committed default in the past are advised to make use of this opportunity to pay up arrears of TDS (tax deductible at source) together with interest on or before 31.07.1994 and avoid penalty and prosecution proceedings.

4. Wide publicity may be given regarding this opportunity.

5. From 01.08.1994, penalty provisions under sections 221 and 271C and prosecution provisions under section 276B will be strictly implemented according to law.

In case of a foreign expatriate working in India, the remuneration received by him, assessable under the head ‘Salaries’, is deemed to be earned in India if it is payable to him for services rendered in India as provided in Section 9(1)(ii) of the Income Tax Act.

The explanation to the aforesaid law clarifies that income in the nature of salaries payable for services rendered in India shall be regarded as income earned in India. Further the income payable for the leave period which is preceded and succeeded by services rendered in India and forms part of the service contract shall also be regarded as income earned in India.

Thus, irrespective of the residential status of the expatriate employee, the amount received by him as salary, for services rendered in India shall be liable to tax in India being income accruing or arising in India, and also be subject to TDS regardless of the place where the salary is actually received.

Text of Section 9(1)(ii)

(ii)  income which falls under the head “Salaries”, if it is earned in India.

Explanation. - For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for -

(a)  service rendered in India; and

(b)  the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment,

shall be regarded as income earned in India ;

KEY NOTE

Explanation under section 9(1)(ii). The need of the Explanation arose in the wake of the decision of the Gujarat High Court in CIT v. S.G. Pgnatale (1980) 124 ITR 391 (Guj.). In that case, the expression 'earned in India' was held to mean income earned by the assessee only by its accrual or arising by the assessee rendering service in respect of which debt was created in his favour.

Source of salary explained

For taxability of income under the head ‘Salaries’, the source should be a contract of employment and the amount received from rendering services in terms of that contract from the employer. The location of payment or of the employee or the place of the contract are of no relevance as long as the location of service is in India. The salary is then stated to have been earned in India.

Source of salary comprises three elements

The source of salary comprises three elements, viz., getting the job, doing it and getting paid for it. Its location could be decided on the basis of the pre-dominant element or elements. If the source of income concerns substantially in making the contract, the place where it is made may be regarded as the only significant factor. If it concerns in first making the contract and then carrying it into effect in circumstances such that both elements are substantial factors in the source, apportionment must be made. If the making of the contract is an insignificant factor and the only substantial factor is its performance, the place of performance is the only legal source. The Income-tax Act deems the performance of service to be the only relevant factor for taxing the amount in India.

Employment exercised aboard a ship

Double taxation avoidance agreements with other countries normally provide that the remuneration derived in respect of the employment exercise aboard a ship or an aircraft operated in international traffic or abroad a boat engaged in inland water transport may be taxed in the State in which the place of effective management of the enterprise is situated. In view of this, therefore, the remuneration in respect of such employment cannot be taxed in India if the effective management is not situated in India subject to exemption as provided in Section 10(6)(viii) of the Income Tax Act, 1961.

Employment exercised by a resident assessee - Taxability in the State of residence

According to the double taxation avoidance agreements, salary is taxable in the State of which the employee is a resident. But in case the employment is exercised in the other State and the remuneration is derived from such exercise, it may be taxable in the other State. For example, in the case of a resident of USA, salary would be taxable in USA for services rendered in India. But if the employment is exercised in India and the remuneration is derived from such exercise, it may be taxable in India also. The words used in the double taxation agreement mostly are, ‘employment is exercised’. Under the Income-tax Act, the words used are ‘service rendered in India’. Thus, there is a distinction between these two expressions. The deeming provision could be applicable only if the services are rendered in India.

'Exercise of employment' and 'rendering services'

Exercise of employment is not the same thing as rendering services. The distinction is the same as the distinction between doing business in India and doing business with India. In the event of a taxpayer deriving employment income, the location of the source of such income is where he performs his duties of employment, since it is the performance of such duties which produces the employment income – FCT v. French 11 ATD 288.

For the purpose of the expression ‘income earned in India’, the geographical source of income is relevant. In a case where the places of the signing of the employment contract, the performance of service and the payment are outside India, the source of employment income derived by the employee while performing his service is outside India.

Employment income taxable only subject to conditions as per DTAA [CBDT Circular No. 2 of 2021,  dated 03.03.2021]

Article related to employment income in the DTAA with different countries governs the taxation of employment income. For example, Article 16 of the Indo-USA DTAA provides following for taxation of employment income:

“DEPENDENT PERSONAL SERVICES

1.  Subject to the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service). 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Stale.

2.  Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first  mentioned State, if:

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year;

(b) the remuneration is paid by, or on behalf of an employer who is not a resident of the other State; and

(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.”

‘183’ days rule for exemption

The double taxation avoidance agreements mostly provide for non-taxability of income as salary if a foreign employer has not been present in the country for more than 183 days. The general rule in the agreements is that income is not subject to tax in the country in which the employment is exercised if—

(a)  the recipient is present in the source country for a period not exceeding 183 days in the fiscal year;

(b)  the remuneration is paid by, or on behalf of, an employer who is not resident of the source country;

(c)  the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the source country.

If the exercise of employment is in the country other than the employer's country of residence, salary or wages would be taxable in the country of his residence rather than in the country where the services are rendered, if any, of the above conditions is satisfied.

‘Ninety days’ rule for exemption

However, in case of a foreign employee there is a provision under the Income-tax Act - section 10(6)(vi) which grants exemption where the foreign enterprise is not engaged in any trade or business in India, the stay of the employee in India does not exceed in the aggregate a period of 90 days in such previous year, and the remuneration is not liable to be deducted from the income of the employer chargeable under the Act.

‘183 days’ and ‘90 days’ rule

Thus, there are two types of exemptions: one in respect of residents of countries with which India does not have a double taxation avoidance agreement (90-day rule); and the other in respect of others, i.e., residents of those countries with which India has double taxation avoidance agreements (183-day rule).

Exemption of  certain amount received by non-citizens in the circumstances mentioned in Section 10(6)

Section 10(6) exempts certain amount received by non-citizens in the circumstances mentioned therein. In case of double taxation avoidance agreements, salary is taxed by the State of which a person is resident unless the employment is exercised in the other State.

The following incomes are exempt when received by an individual who is not a citizen of India: (i) Certain types of Salary or remuneration [Section 10(6)(ii)]      Following types of remunerations are exempted under section 10(6)(ii) of the Income Tax Act – (a)       The remuneration received by an ambassador or other officials of the Embassy, High Commission or Legation of a foreign State in India.  (b)      The remuneration by a consular officer of a foreign State in India.  (c)       The remuneration received by a trade commissioner or other official representative in India of a foreign State, provided corresponding officials of the Government of India in that country are given a similar concession.  (d)      The remuneration received by a member of the staff of any of the officials referred to in (a), (b) and (c) above.      If the person mentioned above in (a) to (d) is a subject of the country represented, is not engaged in any business, profession or employment in India (otherwise than as a member of such staff), and the country represented gives similar concession to the members of the staff of corresponding officials of the Government of India. (ii)   Salary or Remuneration received by non-Indian citizen as an employee of foreign enterprise [Section 10(6)(vi)] (e.g., technician deputed by a foreign firm to work in India) ·                               The amount of remuneration received, by an individual who is not a citizen of India, as an employee of the foreign enterprise is available as an exemption under section 10(6)(vi). ·                        The said remuneration should have been received for services rendered during his stay in India. ·                        The exemption is available only if the below mentioned conditions are satisfied. ·               (a)  the foreign enterprise is not engaged in any trade or business in India ; (b)  his stay in India does not exceed in the aggregate a period of 90 days in such previous year ; and (c)  such remuneration is not liable to be deducted from the income of the employer chargeable under the Act. (iii) Salary or Remuneration to Foreign Employee or Non-Resident Member of Crew, for services rendered in connection with his  employment on a foreign ship [Section 10(6)(viii)]       Eligible exemption and conditions thereon - (a)     The exemption is available towards any income received or due to any individual being a non-resident. (b)     Such income should be chargeable under the head ‘Salary’. (c)     The remuneration should have been received towards the services rendered in connection with his employment on a foreign ship. (d)     The total stay of the employee in India should not exceed the aggregate period of 90 days in the previous year.   (iv) Salary or Remuneration received by an employee of foreign govt. during his stay in India for his training in India [Section 10(6)(xi)]       Remuneration received by an Individual, who is not a citizen of India, as an employee of the Government of a foreign state during his stay in India in connection with his training in any Government Office/Statutory Undertaking, etc. Such remuneration shall be fully exempted if he is taking training in any of the following concern :  (a)       Institution owned by Government  (b)      A company wholly owned by Central or State govt. or partly owned by Central and partly by State Government  (c)       A subsidiary Co. of company referred at point (b) above  (d)      Any corporation established by or under Central, State or Provincial Act  (e)       Any society registered under Societies Registration Act; 1860 and which is wholly financed by Central or State Government.