Taxation of Expats

An expatriate or expat is a person who lives in a country that is not his or her native country or a country in which he or she is a citizen, either temporarily or permanently. This phrase refers to professionals/technicians who are sent by their firms to their affiliated businesses or international subsidiaries. Many people mix up expatriates with foreign citizens who come to India for work; these persons are referred to as immigrants, not expatriates.

The payment obtained by a foreign expatriate working in India, assessable under the head ‘Salaries,’ is deemed to have been earned in India if it is payable to him for services given in India, as stipulated in Section 9(1)(ii) of the Income Tax Act. The above-mentioned law’s explanation emphasises that revenue in the form of salaries paid for services done in India is considered income earned in India.

Regardless of the expatriate employee’s residency status, the sum received as salary for services done in India is subject to tax in India as income accruing or originating in India, and is also subject to TDS, regardless of where the salary is actually received.

When an expat’s salary is paid in a foreign currency, the amount of tax deducted is calculated by converting the salary into Indian currency at the telegraphic transfer buying rate used by the State Bank of India on the date of a tax deduction (Rule 26) in conjunction with Section 192(6) of the Indian Income Tax Act.

It should be noted that this rule only applies to the calculation of income tax in TDS. However, as per Rule 15 of the Indian Income Tax Act, the rate of conversion to be used in calculating salary income is the telegraphic transfer purchase rate on the final day of the month in which the payment is due or received.

To put it another way, an Expatriate’s Indian and foreign salaries are both subject to tax and TDS deduction.

Grossing up of Income in case of Expatriate Taxation

The agreements relating to expatriates are structured in such a way that the tax burden falls on the firm to which the expatriate is assigned rather than the expatriate. When a Japanese expatriate is deployed to India, for example, the expatriate’s income tax burden falls on the Indian company rather than the expatriate employee. Grossing-up is a term that refers to this process.

The net wage is paid to the expatriate employee, and the Indian company pays the tax. Thus, if the expatriate’s salary is Rs.100 and the tax on it is Rs.30, the company will pay Rs.30 in tax. Now the entire payment paid to expatriates will be Rs.130 (Rs.100 as his net salary and Rs.30 as his tax, which has to be paid by any individual on his salary in the normal course of taxation).

Now comes grossing-up, because the tax would be paid on Rs.130, not Rs.100. As an example, in our case, we receive a salary and pay tax from our pocket, therefore our salaries are inclusive of the tax we pay. Similarly, an expatriate’s salary should be regarded as net salary plus tax responsibility, as it has been borne by the company.

The maximum rate of income tax is now 30%, with a 3% education cess, for a total tax rate of 30.9%. Because it was mentioned in the previous paragraph that the company will bear the tax burden, the company will now have to calculate grossed-up tax on the net salary, i.e. Rs.100, in order to cover the total amount paid (Rs.130 in this example), i.e. net salary as well as the tax burden for the purpose of computing tax liability.

As a result, the formula for calculating the grossed-up tax rate is.

30.9 × 100/ (100-30.9)

The maximum tax rate imposed on an individual is 30.9%; formerly, it was 33.99% due to the presence of a surcharge, which is no longer applicable to individuals.

This formula yields a gross-up tax rate of 44.71%, down from 51.49% previously due to the presence of a surcharge.

This is important to note because if the tax rates are changed (i.e. taxes are eliminated or increased), the formula will change as well.