Taxability of globally mobile employees
The Financial Express
Director, Tax & Regulatory Services
The number of globally mobile employees is on the rise: Many individuals working abroad visit India during their stay overseas. The taxability of such individuals in India depends on the residential status during the financial year. While Non-Residents and Not Ordinarily Residents have to pay taxes only on the India-sourced income or any income directly received in India, Ordinarily Residents are subject to tax on worldwide income.
An individual is considered a resident if his stay in India is: (a) 182 days or more during the financial year; or (b) 60 days or more during the financial year and 365 days or more in the previous four financial years. (A resident is further categorised as Not Ordinarily Resident or Ordinarily Resident based on the stay in India during the previous 10 financial years)
Under a beneficial provision in the Indian tax law, the 60-day rule mentioned above is extended to 182 days in certain situations: (a) where a citizen leaves India for purpose of employment outside the country; and (b) where a citizen or a person of Indian origin located outside the country comes on a ‘visit’ to India in any year. In the absence of this exception, the 60-day rule would generally cover most Indians leaving India for their first international assignment.
The above exception seeks to relax the test of residence for citizens going abroad for employment and visiting India while being outside the country. For example, it enables individuals located abroad to stay in India for longer duration for visits to meet relatives and/or manage investments without triggering taxation on their worldwide income.
The availability of the benefit of 182 days was examined by the Authority of Advance Rulings (AAR) in a recent ruling of Smita Anand. In the facts of the ruling, the individual, an Indian citizen, returned to India in February 2011 after resigning from employment in China. She claimed her status for financial year 2010-11 to be Non-Resident by applying the above-mentioned exception on the basis that she had come on a visit and not with the intention of permanently settling in India. She would, therefore, not be taxable on her overseas employment income.
However, the AAR was of the view that the extended threshold of 182 days for an Indian citizen cannot be available for the financial year in which the individual returns to India after resigning from her employment abroad.
The individual cited factors like letting out property owned in India, meeting relatives and friends, travelling to different locations for holidays and validity of work permit in China to justify that she had come here only for a visit. However, the AAR was of the view that she did not come to India only for visit, as her return was subsequent to resigning from her employment in China and she, therefore, qualified as a resident.
The AAR distinguished the above case from others where the benefit of the extended threshold of 182 days was held to be available on the basis that the individual visited India during continuity of overseas employment. As taxation of worldwide income in India could be triggered based on the nature of the individual’s return visits to India and surrounding circumstances, it becomes critical to continuously monitor the impact on residential status. Further, employers of such individuals may also be impacted on account of tax-withholding obligations triggered by a change in the individual’s residential status.
Views expressed are personal.