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Tax System Tax Administration Taxation of Corporation
Taxation of Foreign Operations Taxation of Shareholders Taxation of Foreign Corporations
Partnerships and Joint Ventures Taxation of Individuals Taxation of Trusts and Estates
Indirect Taxes Tax Treaties  
 

Tax planning for expatriates.

Non resident employees are taxable only on remuneration (including the value of perquisites) for services rendered in India, wherever paid. Any other income is taxable only if it is received in India or arises or is deemed to arise in India.

Remuneration from an employer is not taxable if the expatriate's sty in India does not exceed 90 days (183 days under treaties during the year if certain conditions are fulfilled.

Timing of arrival and departure maybe planned to take advantage of the 90 / 183 - day rules.

Expatriate technicians (including nonresident Indians) satisfying specified conditions are not liable to pay further tax on remuneration for four years if the employer bears the tax.

Tax clearance is necessary before any expatriate; departure if the stay in India is continuous for more than 120 days.

In most other respects, expatriates are taxed on the same basis as Indians.

Territoriality and residence

The extent of Indian tax liability depends on the residential status of the individual. For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Residents are on worldwide income. Nonresidents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a nonresident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India.

Residence rules

An individual is treated as resident in a year if present in India (I) for 182 days during the year or (2) for 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.)

A resident who was not present in India for 730 days during the preceding seven years or who was nonresident in nine out of ten preceding yeas I treated as not ordinarily resident. In effect, a newcomer to India remains not ordinarily resident

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for the first nine years of residence in India.

Special provisions for foreigners

Foreigners are entitled to certain special concessions as follows.

1. Remuneration received by a foreigner as an employee of a foreign enterprise for services rendered in India is not subject to Indian income tax, provided :
a. The foreign enterprise is not engaged in any trade or business in India;
b. The foreigner is not present in India for more than 90 days in that year; and
c. The remuneration is not liable to be deducted in computing the employer's taxable income in India.
In a treaty situation, the 183-day rule applies.

2. A foreigner (including a nonresident Indian) who was not resident in India in any of the four financial years immediately preceding the year of arrival in India is entitled to a special tax concession, if :
a. The foreigner has specialized knowledge and experience in construction or manufacturing operations, mining, generation of electricity or any other form of power, agriculture, animal husbandry, dairy farming, deep-sea fishing, shipbuilding, grading and evaluation of diamonds for diamond export or import trade, cookery, information technology (including computer architecture systems, platforms and associated technology), a software development process and tools, or such other fields as the central government may specify; and
b. The individual is employed in any business in India in a capacity in which specialized knowledge and experience are used.
During the first 48 months commencing from the date of arrival in India, the remuneration will not be subject to any further tax in such a foreigner's hands if the employer bears the tax on the remuneration.

3. A visiting foreign professor who teaches in any university or educational institution in India land whose contact of service is approved by the central government is exempt from tax on remuneration received during the first 36 months from the date of arrival in India, provided the teacher was not resident in India in any of the four financial years immediately preceding the year of arrival in India. If the foreigner continues in employment in India thereafter, the remuneration of the following 24 months is taxable; however, if the tax is paid by the university or education institution, there is no further tax liability.

4. Salary received by a nonresident foreigner in connection with employment on a foreign ship is exempt from tax if the employee's stay in India during a year does not exceed 90 days.

5. Special exemptions under specified circumstances are available for the following :
a. Amounts receivable from a foreign government or a foreign body by a foreigner for undertaking research in India under an approved scheme;
b. Remuneration received by employees of a foreign government during training with the Indian government or in an Indian government undertaking (applicable to individuals assigned to India under cooperative technical assistance programs in accordance with agreements between the Indian government and a foreign government); and
c. Remuneration received by nonresident expatriates in connection with the filming of motion pictures by nonresident producers.

 

GROSS INCOME 

 

Employee services

All types of remuneration received or receivable by an employee from the employer for services rendered, including the value of benefits-in-kind (i.e., perquisites), are subject to tax. Car, housing and servants are concessionally taxed (see "Valuation of perquisites" below). Reimbursement of medical expenses and leave passages paid by the employer are exempt from tax up to specified amounts. Allowances granted to meet expenses on tour, in a transfer in connection with employment or for conveyance in performance of office duties are deductible to the extent spent for the purpose. Allowances granted for Children's education and for meeting children's hostel expenditure are exempt up to Rs 50 per month and Rs 150 per month per child, respectively, up to a maximum of two children. Payments toward children's education in excess of these amounts are taxable.

The cost to the employer for providing retirement benefits under schemes approved by the Tax authorities are exempt, except for the employer's contribution to recognized provident funds in excess of 10 percent of the salary. Cashing of accumulated leave at the time of retirement is exempt up to specified limits.

Compensation for termination of service or for modification of the service terms is taxable. Gratuities paid upon retirement, death or termination of service are exempt to the extent of a half month's salary for each completed year of service or Rs 250,000, whichever is less. Pensions for past services rendered in India are taxable, although payments in commutation of pension are exempt up to prescribed limits.

Where an employer bears the tax liability, the employee's taxable income is determined by grossing it up with the tax paid by the employer so that the tax on the grossed-up income is equal to the tax paid by the employer. In such cases, the amount of tax may be significant. However, such grossing up is not required in the case of approved foreign technicians, as indicated in item (2) under "Special provisions for foreigners."

Residents are taxed on their worldwide income irrespective of where the services are rendered, but are entitled to claim credit for foreign taxes paid, as explained below under "Double taxation relief".

 

Valuation of perquisites 

Perquisites are values as follows.

1. The value of rent-free accommodation provided by the employer is deemed to be 10 percent of the salary (including allowances) due to the employee during the period of occupation of the accommodation. If the fair rental value of the accommodation exceeds 50 percent of the salary (60 percent in Mumbai (Bombay), Calcutta, Delhi and Madras), the excess is added to the base value of 10 percent.

Where furniture is also provided, the value of furniture (including television sets, radios, refrigerators, household appliances, and air conditioners) is deemed to be 10 percent of the original cost of the furniture is hired, the actual rental charges. If, instead of providing accommodation, the employer gives a house rent allowance to the employee, a portion of the allowance is exempt from tax.

2. The value of a car provided by the employer that is used for both personal and business purposes is as follows :

Kind of use

cars with limited capacity *

other cars

Running and maintenance Expenses met by employer

600

800

Expenses for personal Use met by employee

200

300

Cars not exceeding 16 horsepower or engines not exceeding cubic capacity of 1.88 liters

If a chauffeur is also provided, the perquisite value mentioned above is increased by Rs 300 per month. If the employee owns the cat but all expenses are met by the employer, the perquisite value is the sum spent by the employer reasonably attributable to the use of the car for personal purposes.

3. Services of a sweeper and a watchman directly employed by the employer and placed at the disposal of the employee are concesionally valued at Rs 120 per month for each such person.

4. Other perquisites, in most cases, are valued at the cost incurred by the employer for providing them.

 

Capital gains 

Gains on the transfer of capital assets are subject to tax in the individual's hands. Nonresidents are subject to tax only on gains from the transfer of capital assets situated in India (or from the transfer abroad of foreign assets if sales proceeds are received directly in India). Capital gains are computed in the same manner as in the case of companies. Gains on the transfer of residential house are exempt if they are reinvested in acquiring or constructing another residential house within a specified period.

 

Other income 

For residents, in addition to income from employment and capital gains, all other types of income (e.g., income from property, profits and gains from a business or profession, royalties, dividends, interest, and miscellaneous other income), wherever earned or received, are includable in the taxable income.

For nonresidents, such income is subject to tax only if its received in India or it arises or is deemed to arise in India. Therefore, foreign-source income of nonresidents (e.g., income from foreign-source dividends and interest) is not taxable in India unless received directly in India.

Rents from residential property are taxed after allowing specified deductions for repairs, municipal taxes, insurance premiums, interest on loans, etc. Profits from a business or profession are computed in the same manner as for companies.

A deduction is allowed for interest on government securities, debentures of specified cooperative societies and institutions, deposits with banks, and mutual funds and on dividends from Indian companies, unit trust and cooperative societies, up to an aggregate of Rs 13,000 pr year. It is proposed to increase this amount to Rs 15,000, out of which Rs 3,000 will be allowed only for the dividends and the mutual funds interest.

In the case of a nonresident, interest on money on deposit in a nonresident (external) account in any bank in India and, in the case of nonresident Indians, interest on specified national savings certificates purchased in foreign exchange is entirely exempt from tax, subject to specified conditions.

 

Closely held companies 

Closely held companies are discussed under "Intercompany transactions". Advances or loans given by a closely held company to a shareholder with 10 percent or more of the voting power or to a concern in which the shareholder at any point of time during the year, is entitled to 20 percent of the income of the concern, as well as payments made for the benefit of such shareholder, are in certain circumstances taxed as dividends in the hands of the shareholder. However, the advances or loans will not be so taxed where they are made in the ordinary course of business if lending money is a substantial part of the company's business.

 

DEDUCTIONS 

Business

AS noted above, allowances granted by the employer to meet the cost of travel on tour, transfer or conveyance in performance of office duties are deductible to the extent actually spent for that purpose. A standard deduction is allowed to all employees equal to one-third of salary or Rs. 15,000 (Rs 18,000 for women with an income not exceeding Rs 75,000), whichever is less. Deductions are also allowed for allowances granted to meet expenditures for engaging a helper in performance of the duties of an office, for academic research and other professional pursuits. or for purchase or maintenance of uniforms, to the extent actually spent for the purposes. No other business deductions are available.

Nonbusiness

No deductions are available from salaries for interest or taxes (other than for state employment tax, which is minimal). Deduction up to certain limits are allowed for donations to approved charities and medical insurance premiums.

Personal allowances

Currently, there are no personal allowances, other than a deduction for certain high altitude and border area allowances generally applicable to defense personnel. However, tax credits are available for certain investments out of taxable income.

Nonresidents

All the deductiions mentioned above are applicable to nonresidents.

 

Double taxation relief 

Residents are allowed double taxation relief for foreign taxes withheld or paid on foreign-source income, either under treaties or unilaterally under the credit method. The credit against the Indian tax liability on the worldwide income of the resident is limited to the lower of the foreign tax withheld or paid and the Indian tax on the doubly taxed income.

Nonresidents are entitled to claim double taxation relief under the treaties in their country of residence.

 

TAX COMPUTATION 

Taxable income

Income from all sources (other than long-term capital gains) less all deductions available is aggregated to determine the total taxable income (see Appendix VIII for a sample tax calculation). Long-term gains are separately taxed at lower rates.

Tax rates

Income tax is calculated at graduated rates (see Appendix VI). On income of Rs 120,000, the tax is Rs 22,000 (it would be Rs 21,000 under the Finance Bill 1996 proposal), and income in excess of Rs 120,000 is taxed at 40 percent. Long-term capital gains are taxed at 20 percent.

Tax credits

A rebate is allowed against the gross tax liability equal to 20 percent of the amount invested or deposited in life insurance policies, recognized provident funds, approved superannuation funds, etc. The total rebate is limited to Rs 12,000.

All income taxes withheld or paid are credited in full against the tax liability. Credit for foreign taxes paid are allowed as explained under "Double taxation relief" above.

 

OTHER TAXES 

Local tax on income

Some states levy nominal taxes on employment, trade and the professions. These taxes are deductible in computing taxable income from salaries and profits from a business or profession.

Wealth tax

An individual is liable to pay wealth tax at 1 percent on net taxable wealth that is in excess of Rs 1,500,000 as of the last day of the year. Net wealth means value of specified assets (e.g. residential houses, urban land, jewelry, bullion, motorcars, yachts, boats, aircraft, cash-in-hand in excess of Rs 50,000) in excess of debts secured by or incurred in relation to those assets. However, the value of one residential house is exempt from wealth tax.

Foreigners, nonresidents and those not ordinarily resident are exempt from wealth tax on assets located outside India. Correspondingly, no deduction is allowed for foreign debts.

Gift tax

Gift tax is levied on the donor at 30 percent on the aggregate value of taxable fits in excess of Rs 30,000.

Gifts exempt from tax include fits by a nonresident Indian to any relative in India in convertible foreign exchange and fits of specified government bonds.

Inheritance tax

There is no inheritance tax. However, stamp duty is payable on the transfer of property by inheritance.

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