If an NRI renders services overseas, and receives his salary overseas, or in an Indian bank account, such salary remains non-taxable in India. This ruling is as per the go to link Authority of Advance Rulings (AAR). AAR held that the amounts received in the country could not be taxed under the domestic laws. The ruling stands out because it also provides respite from double taxation under the Indo-US tax treaty.
Quite interestingly, this quasi-judicial body AAR does not set a standard. However, one can vouch for its persuasive value and high regards.
It is true that, when a white-collared employee is deputed or ‘seconded’ overseas by an Indian organisation, his/her salary is split. To clear the confusion here, an employee under secondment is transferred overseas under the payroll of the group or the parent organisation. The organisation pays the basic and certain allowances in the country of stay. The Indian counterpart credits a part of the salary in the employee’s Indian account. This helps the employee to cater to his financial obligations back home, such as household expenses, home loans, etc.
The classification of NRI is quite different under the tax laws. The number of days that an individual stays in India determines whether he or she will be taxed as a resident or non-resident. The residents are taxable in the country on their global earnings, regardless of where it comes from. However, the non-residents are taxable only on the income accrued in India. For the RNOR (Resident but Not Ordinarily Resident), the tax implications are the same for non-residents.
Usually, a split salary arrangement ends in a litigation. The income tax authorities seek to make income received in India taxable. However, it is ensured that the same income is not taxed twice.
Again, based on Indo-Us tax treaty, the AAR said that the place of work of an employee should be considered, and not the country of receipt of his/her salary. If an employee is paid for his services in the US, the salary should be taxed only in the US and not in India. Interestingly, AAR also held that the salary, if received in India, should not be taxable under the domestic tax laws. In the absence of a tax treaty, such as with Hong Kong or in case a taxpayer is not able to access a treaty due to the lack of required documents, this arrangement is helpful.
Mr. Nageswara was deputed in the US for a period of two years. However, once he was back in the country he became a resident and was liable of a tax on his global income. As per the US tax laws, his earnings were taxable in the US. In this case, the AAR held that Mr. Nageswara would be entitled to a tax credit for the US taxes.
Mail us your queries for your investments in India email@example.com