Overseas assignment : In early 2004, Shyam from Bangalore was sent abroad for the first time by his Indian employer Tech-INDIA to work on a short assignment for TechEUR.
Typical of a short-term secondment (secondment is detachment of a person from their regular organisation for temporary assignment elsewhere ), Shyam continued to be on the rolls of TechIND his regular salary was paid into his Indian bank account and per-diem allowance (daily allowance) was paid overseas during the secondment period.
Shyam returned to India in July and then TechEUR wanted Shyam to come back again but on its payroll for a period of two years effective September 2004.
The tax laws:The scope of income that is chargeable to tax in India depends on the residential status of the individual for that tax year (which runs from April 1 to March 31). A person who leaves India for the purposes of employment outside India, would be a non-resident if his/her stay in India was less than 182 days in that tax year.
An overseas assignment for a period of 2 years, where the payroll is shifted out from India would qualify as employment outside India . Would therefore an overseas secondment without a payroll shift get covered?
Maybe if it is factually proved that the effective employer is the overseas entity (i.e. Supervision , control, and reporting relationship is only with the overseas entity; the overseas entity bears the salary costs and for mere administrative convenience, the payroll is retained in India).
Shyam therefore qualified to be a non-resident in India for the tax year ended March 31, 2005, and salaries paid by TechEUR from September were not offered to tax in India.
However, Shyam qualified to be a tax resident in the overseas country for the calendar year December 31, 2004 and his worldwide income, including salaries offered to tax in India from January to August 2004, was taxed.
Shyam claimed an exemption in India for salaries from April to August 2004, as conditions prescribed in the relevant tax treaty were met. However, as TechIND had already deducted taxes for this period, Shyam made a refund claim in the tax return filed in India.
If Shyam was not eligible for this exemption , he would have claimed a credit in the overseas jurisdiction of the taxes relating to this period paid in India.
The challenge: While the above scheme of taxation is logical, the practical challenge arises on account of timing differences (caused by differential tax years, due dates for tax deposits / return filing, etc.) in the two countries and the extent of supporting documentation requested by the tax authorities in India for permitting the refund claim.
The time limit for completion of assessments is 21 months from the end of the assessment year. Thus, assessments for the tax year ended March 31, 2005 will be finalised by December.
Shyam must not lose sight of the tax position adopted in his tax return filed in India, as explained above and must keep ready all information that could be called for during the assessment proceedings.
An illustrative list would include: Proof of non-residence (copy of passport along with endorsements ); extract of bank account statements; details of investment in movable and immovable property including source for investments; copy of employment contract-including break-up of components;acknowledged copies of tax returns filed in the overseas jurisdiction including copy of any assessment orders; statement of assets and liabilities for the last three years and tax residency certificate from the overseas country.
Collation of the above documentation is time consuming ; however, non-submission of adequate documentation to support the tax position adopted could result in denying the refund claim.
Conclusion: Those who have been on oveaseas assignments must ensure that they prepare, plan and understand the tax impact in an overseas secondment scenario.
They must not forget to maintain records as these would be required two years down the line in assessment proceedings.
(Charanya Venkat & Balaji Balasubramanian, Ernst & Young)