The Hindu Business Line : How to make foreign stints less taxing

Before you go on overseas deputation, you must be aware of certain regulatory requirements. A little effort to fully understand the issues involved can prevent a lot of eleventh-hour hassles.

Taxation matters, especially when going on a stint abroad.

Parvatha Vardhini C

You are in that dream job with that dream company. And, like the icing on the cake, that much-awaited stint abroad has arrived. While you have made the mandatory visa visits to the embassy, given your wardrobe a new look and written down recipes for your favourite dishes, spare a thought for the new tax and regulatory environment you will find yourself in. If you put in a bit of effort to fully understand the issues involved, you can save yourself a lot of eleventh-hour ha ssles.

Browse the Internet, and you will find numerous queries from employees like you travelling overseas on deputation or assignment:

— I am an employee of a Chennai-based company deputed to London for one year. Do I fall in the NRI category?

— I left India on international transfer to our UK office in September and am getting a UK salary since then. Is it taxable in India?

— I’ve just been posted to the US for a long term. Can I continue to operate my Indian bank accounts?

— I have some savings in the allowances during my assignment abroad. If I bring it back to India, will it be taxed?

Determine your residential status first. As a first step, you need to find out if you are a ‘resident’ in India for every year in which you are out of the country, under tax laws. This is necessary as, under the Income Tax (IT) Act, the tax treatment of your earnings will vary depending on your residential status. For someone travelling overseas, a simple rule of thumb to determine if he is a resident will be to check if his stay in India in a financial year (April 1 to March 31) will exceed 182 days.

For example, take the case of a programmer who works onsite in Canada from October 15, 2007 to January 22, 2008. For the year ended March 31, 2008, he will be a resident as he has been abroad only for about 100 days during that year and has stayed in India for the remaining 265 days.

If he is sent abroad from January 22, 2008 to, say, January 22, 2009, then, for the year ended March 31, 2008, he will be a resident but for the year ended March 31, 2009, he will become a non-resident as he would have spent less than 182 days in India.

So, the next time you hear the words ‘short-term’ and ‘long-term’, remember, IT law does not decide your residential status that way. It’s the 182-day rule that rules.

The FEMA angle

But, wait, didn’t your friend tell you that he opened a non-resident bank account just before he left for the UK on a ‘long-term’ deputation? How could he have opened a non-resident account even before determining his residential status?

This is because under FEMA, (Foreign Exchange Management Act) a person may become non-resident simply by leaving India on purposes of employment or for any other purpose that would indicate his intention to stay abroad for an indefinite period. While FEMA is concerned with your rights and obligations in moving funds in and out of India, the IT Act is bothered about the taxability of such funds and their movements.

So, don’t be foxed if you are considered resident for income-tax purposes and non-resident for banking purposes in the same year!

Remuneration and taxes

When an employee goes abroad for a few weeks or months, the Indian company retains him on their payrolls and continues to credit his salary to his local bank account. In addition, he will get some allowances to meet his personal expenses during the period of his stay.

In such a situation, he will be a resident in India by virtue of having spent more than 182 days here and his Indian salary will be subject to tax in the usual manner. The allowances will be exempt from tax.

In many cases, the employee is given a salary both in India and abroad. If you are on deputation for, say, three years, what will you be taxed on? A golden rule to remember is that a resident should pay tax on his global income. So, in the first year, if you are a resident, then both your Indian and your foreign salary will be taxed in India.

In the second year, when you become a non-resident, only income received, accruing or arising or deemed to be received or accrue or arise in India will be taxed in your hands.

This means that, although you are a non-resident, your Indian salary will still be taxed here while your foreign salary will be tax-free as it is received outside India from a foreign source.

When you are paid salary only in the foreign country, the tax incidence will be the same as above. Thus, in the first year, if you are a resident, your foreign salary will be taxable in India.

In the subsequent years, it will be tax-free as it arises outside India from a foreign source in the hands of a non-resident.

Double Taxation?

Relax. There’s a way out Take the case of Shilpa, who works with a software company in India. From July 2006-November 2006, she was sent to the US and was paid her salary there after withholding tax. For the rest of the months, she was paid salary in India as usual.

For year ended March 31 2007, Shilpa was surprised she had to pay tax in India for the income received in the US (because she was a ‘resident’ under IT Act for that period) though the US authorities had already deducted tax when they paid her. This is unfair! She has been taxed twice on the same income!

If you find yourself sailing in the same boat, cool off. India has signed Double Taxation Avoidance Agreements (DTAA) with several countries. You can claim a relief in India on the doubly taxed income, which will be the lower of taxes leviable in India or the other country you visited.

Want to send money home?

Most companies who send their employees abroad for a longer term, say two or three years, do so after helping them open a non-resident account with a local bank. Besides, you can also open an NRE (Non-Resident External) account. The NRE account allows funds to be freely repatriable (moved back). This fund will be maintained in rupees and any debit or credit of foreign currency will be converted immediately to rupees.

You can give your parents the ‘power of attorney’ to operate it on your behalf. Whenever your family needs money, you can credit it into the NRE account from your account abroad and your parent can withdraw it. If not, you could also send cheques or drafts.

Should you go to a foreign location for a very short period, says two months, you may not have the privilege of using bank accounts or cheques. In such cases, the most popular method seems to be to first credit the money into a friend’s bank account and then send it to India. Online money transfers are also a popular mode of sending money into India.

All remittances are tax-free.

Can you bring back savings?

At the end of your stint, you can bring foreign exchange into the country without any limits. However, if the aggregate value of the foreign exchange in the form of currency notes, bank notes or travellers cheques brought in exceeds $10,000 or its equivalent and/or the value of foreign currency exceeds $5,000 or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

You can retain up to $2000 in foreign currency. Anything over and above this should be converted into rupees when you land.

Procedures to comply with

Before you go on your overseas deputation, you must be aware of certain regulatory requirements. At the time of departure, you should furnish your PAN (Permanent Account Number) number, the purpose of your visit outside India and the estimated period of your stay abroad to the income-tax authorities.

Similarly, when you go abroad, you must register with the authorities there. For example, in the US, whether you want to rent an apartment or open a bank account, you cannot do it without a Social Security Number (SSN).

Besides, you should also file your returns there and pay tax on any income that may arise, like interest on any deposits. When leaving, remember to get a tax clearance certificate or its equivalent.

And do enjoy your stay!

More Stories on : International Travel | Insight | Income Tax

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