The Hindu Business Line : Tax effect of new visa regulations

Foreign nationals coming to execute projects in India are henceforth required to obtain employment visas. This could lead to unintended tax issues in certain specified situations.

Companies need to carefully evaluate the visa guidelines before deputing foreign nationals in India.

Vikas Vasal

Recently, the Government issued guidelines in respect of grant of visa to foreign nationals on project-based assignments. It has been clarified that business visas should be issued only to foreign nationals who visit India to establish industrial/business venture or explore possibilities to set up industrial business ventures or purchase/sell industrial products.

Foreign nationals coming to execute projects/contracts in India are henceforth required to obtain employment visas.

Further, it is proposed that employment visa would be granted only to skilled and qualified professionals mainly for senior-level positions.

Employment visa would not ordinarily be granted where large numbers of qualified Indian’s are available or for jobs which are routine/secretarial/clerical in nature. The due date for compliance with these guidelines is October 31, 2009. It is pertinent to note that, keeping in view the growing economic importance of India in the global economy, a large number of foreign nationals are working in India on different assignments. Therefore, companies (both foreign and Indian) and foreign nationals working on projects/contracts might be caught unawares and could be affected.

Ideally, such regulatory guidelines should come into force prospectively, i.e., the existing visas (business or otherwise) duly granted by Indian embassies/consulates should hold good till expiry and only new visas to be granted should in turn be covered by the guidelines.

Tax issues

Besides immigration issues, the said visa guidelines, could also lead to unintended tax issues in certain specified situations.

Therefore, these need to be carefully evaluated by the companies deputing/employing foreign nationals in India.

In many cases, depending on the nature of the project, installation of machinery, provision of services, etc., foreign nationals are deputed as part of the larger engagement wherein the services provided by the foreign nationals are covered under a ‘Fee for Technical Services’ arrangement between the Indian company and the foreign company.

Generally, under these arrangements, the expatriate visits India for a short duration, say, for few weeks/months and render the necessary services to the Indian company, which,, while paying the fee for technical services to the foreign company, withholds and deposit the tax as applicable.

Further, the foreign nationals who visit India on short-term assignments claim short-stay exemption under the respective Double Taxation Avoidance Agreements (DTAAs) subject to fulfilment of specified conditions and, hence, may not be subject to tax in India.

In the past, the foreign nationals have generally been obtaining business visa keeping in view the specific work requirements. If, however, now an employment visa is to be obtained then the issue arises whether they necessarily require an employment contract in India from an Indian company.

This is particularly relevant as different documentation requirements are to be complied with in respect of obtaining an employment visa in different countries depending on the understanding/agreements between Indian and the foreign countries on immigration matters.

In the event, an Indian employment contract is insisted upon, then it could lead to an employment situation in India wherein the expatriate might be liable to tax in India and may not be eligible to claim short stay exemption.

Further, in case they are treated as employees of the foreign company, then it might lead to a larger corporate tax and transfer pricing issues, with the overseas companies of having a potential permanent establishment/business connection exposure, subject to facts of each case. Under the current guidelines, what would exactly constitute a project/contract is not been defined, therefore, it could lead to different interpretations.

Therefore, it is important for foreign companies to review the existing deputation/secondment arrangements to ensure compliance with the visa guidelines.

Further, the tax implications for foreign nationals and the companies should be re-examined to avoid any surprises.

Way Forward

Keeping in view the growing importance of India and the fact that more and more foreign nationals are likely to come and work in India, it is important that immigration rules are laid out to bring in clarity to address different situations and that the same are in sync with the taxation laws. This would otherwise be another area of potential dispute and prolong litigation.

(The author is Executive Director, KPMG.)

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