With COVID-19 restrictions constantly changing worldwide, many employees who left their countries on business trips / visits, have been stranded. Travel restrictions have left employees in situations that could have unintended tax implications for them.
Stranded in India
-Indian citizens employed abroad, visiting India for personal / business purposes and unable to return to their payroll country; or
-Expatriates who extended their assignment in India, as they could not leave India.
Stranded outside India
-Indian citizens who temporarily left India for personal / business purposes and are unable to return; or
-Foreign nationals employed in India, visiting their home country and unable to move back to India.
Such resultant overstay may lead to double taxation for these employees.
For instance, the home country (where the employee usually resides) will seek to tax the employee’s salary income by virtue of his employment in that country, residence, or any other similar factor; and the destination country (where the employee is visiting temporarily, but got stuck due to travel restrictions) may seek to tax the salary income as the employee is working remotely from that country.
However, there are certain benefits which are available under the domestic tax law of India and also under the double tax avoidance agreements (DTAAs) between India and the country, wherein the employee may avoid such double taxation. Some of the ways to mitigate such double taxation are outlined here.
Benefits for employees stranded in India
Short stay exemption under the DTAA
In case an employee has workdays in India, it is possible to claim a short stay exemption under the treaty if all the conditions mentioned thereunder are satisfied. The common conditions under the treaty that need to be satisfied are as under:
-The employee is present in India for less than 183 days in the fiscal year or rolling period of 12 months (as mentioned in the treaty);
-The salary is paid and borne by the overseas employer for the employee’s workdays / business visits to India;
-The salary is not borne by a permanent establishment / fixed base / trade or business which the overseas employer has in India; and
-The remuneration should not be deducted in computing the profits of any company chargeable to tax in India.
It is necessary that the employee should be a resident in the overseas country and a tax residency certificate has to be obtained from the overseas tax authorities to that effect.
However, one may have to look into the actual provisions and conditions mentioned under the relevant DTAA between India and the overseas country to claim the aforesaid exemption.
Short stay exemption under the domestic tax law of India
The provisions of the Indian tax laws also provide an exemption to foreign nationals coming on short visits to India if the following conditions are satisfied.
-The overseas employer is not engaged in any trade or business in India;
-The employee’s stay in India does not exceed 90 days (in aggregate) in the financial year; and
-The remuneration is not liable to be deducted from employer’s income chargeable to tax in India.
Benefits for employees working in India, but stranded outside India
Exemption for salary pertaining to overseas workdays
There is an exemption under the DTAA in case a person is stranded outside India, provided the following conditions are fulfilled:
-The employee qualifies to be a non-resident in India;
-The employee should be a resident in the overseas country and a tax residency certificate is obtained from the overseas tax authorities to that effect; and
-The employee has workdays outside India and the taxes are paid outside India on the said income.
However, before claiming this exemption, one should be aware of which entity bears the salary cost and the benefit accrues to which entity (i.e. Indian entity or overseas entity).
Claiming credit for overseas taxes
Where the employee stranded outside India continues to be a resident in India and is subjected to tax both in India and the overseas country (i.e., in case any exemption is not available in overseas country), the employee may opt to claim credit of overseas taxes paid in the Indian tax return for the foreign sourced income. In such a case, the employee will be required to file Form 67 in India (prior to the filing of tax return), along with the evidence of taxes paid in the overseas country. The conditions mentioned under the DTAA / domestic tax laws should be fulfilled to claim the tax credit.
The above tax benefits under the treaty or the domestic tax law could bring some relief to employees who are otherwise facing various challenges of working away from home.(With inputs from Niji Arora, Senior Manager, Zalak Shah, Deputy Manager with Deloitte Haskins and Sells LLP)