Taxation of Expats

An Expatriate or expat is a person residing in a country, temporarily or permanently, which is different from his/her home country or you could say different from a country in which he/she is a citizen. This term is broadly used in the context of professionals/technicians sent by their companies to their associated enterprises or foreign subsidiaries. Many people confuse expatriates with foreign citizen coming to India for employment, those are called immigrants and not expatriates.

In case of a foreign expatriate working in India, the remuneration received by him, assessable under the head ‘Salaries’, is deemed to be earned in India if it is payable to him for services rendered in India as provided in Section 9(1)(ii) of the Income Tax Act. The explanation to the aforesaid law clarifies that income in the nature of salaries; payable for services rendered in India shall be regarded as income earned in India.

Irrespective of the residential status of the expatriate employee, the amount received by him as salary, for services rendered in India shall be liable to tax in India being income accruing or arising in India, and also be subject to TDS regardless of the place where the salary is actually received.

Where salary of an expat is payable in foreign currency, the amount of the tax deducted is to be calculated after converting the salary payable into Indian currency at the telegraphic transfer buying rate as adopted by State Bank of India on the date of deduction of tax (Rule 26) read with Section 192(6) of Indian Income Tax Act.

It may be noted that this rule is applicable only for determination of Income Tax in TDS. However, in computing the salary income, the rate of conversion to be applied is the telegraphic transfer buying rate on the last day of month in which the salary is due or is paid as per Rule 15 of Indian Income Tax Act.

In simple words, both the Indian Salary as well as the Foreign Salary of an Expatriate are liable to Tax and Deduction of TDS

Grossing up of Income in case of Expatriate Taxation

The agreements related to expatriates are formed in a way that tax burden is not on the expatriate but on the company to which he/she is sent. For example when a Japanese Expatriate is sent to India, then the income tax burden of that expatriate will be on the Indian Concern and not on the expatriate employee. This gives rise to the concept of grossing-up.

The expatriate employee gets the net salary and tax on this is paid by the Indian company. Thus if the salary given to the expatriate is Rs.100, assume the tax on it is Rs.30, Rs.30 will be paid by the company. Now this will make total amount paid to expatriate 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 normal course of taxation).

Now grossing-up comes into play, as tax will be paid, not on Rs100 but Rs.130. Like in our case we get salary and we pay tax from our own pocket thus we get salaries our inclusive of tax we pay. In the same way an expatriate’s salary is to be considered as net salary + tax liability on it, as it has been borne by the company.

Now the maximum Rate of Income Tax is 30% and education cess is 3%, thus total tax rate is 30.9%. In earlier paragraph it was mentioned that tax is to be bared by the company, so now company will have to calculate grossed-up tax on the net salary i.e. Rs.100 in order to cover the total amount paid (Rs.130 mentioned in example) i.e. net salary as well as the tax burden for the purpose of computing tax liability.

So the formula through which grossed-up tax rate is to be computed is:

30.9 × 100/ (100-30.9)

Here 30.9 is the maximum tax rate charged for an individual, earlier it was 33.99 due to presence of surcharge, which is not applicable for indivuals anymore.

Through this formula we’ll get 44.71% rate of grossed-up tax, earlier which was 51.49% due to presence of surcharge.

This is being mentioned because if the tax rates are amended (i.e. taxes abolished or added), this formula would change accordingly.