The basis for charging tax on income primarily depends upon the receipt or accrual of income and the residential status of the taxpayer. Generally, a person who is resident is taxed on his world income in India. But a person who is a non-resident or who is a not ordinarily resident does not pay tax on foreign income in India.
The salary income, however, stands in a peculiar situation under the Indian income tax law. The income under the head salaries will be taxed in India if it is earned in India. Salary for services rendered in India shall be regarded as income earned in India.
Because of this provision, the salary income of a foreigner would be taxable in India if such salary is earned in India, irrespective of the fact whether it is received in India or outside. The implication of this provision is that a foreigner who receives his salary income wholly outside India, or partly in his home country and partly in India, is liable to pay tax in India on his entire salary income, including that portion of his salary which is received by him outside India.
Practical problems, however, do arise when a person is a resident of one country but he exercises his employment in another country. The problem is further multiplied by the different types of tests which are prescribed to determine the residential status of a person in different countries.
For example, in India, the test for determining the tax status is the number of days a person lives in India in a particular fiscal year. In certain countries the determination of tax status is based on domicile, residence, citizenship, place of management or other criterion of a similar nature.
The above situation often makes an expatriate employee resident of both India and the other country. In such a case, it is to be decided as to where his salary income will be liable for tax.
The solution is to be found in the related tax treaty. The tax treaties generally provide that income from employment is taxed in the State where employment is actually exercised. But, the State where the employment is exercised may not tax the income if the individual is present in the other Contracting State for a period not exceeding 183 days in the 12-month period.
In the above context, it will be useful to refer to a recent ruling by the Authority for Advance Rulings in the case of British Gas India Pvt. Ltd. (2006) 287 ITR 462. In this case, two Indian employees were deputed to work in UK. During the period of deputation, they continued on the payroll of the Indian company and regularly received salary in India. However, they received certain allowances in the UK.
The following questions were referred to the Authority:
Whether the salary income received in India from Indian company for rendering services outside India is taxable in India?
Whether the Indian company is required to withhold taxes on salary paid in India for rendering services outside India?
The Authority ruled that salary paid by the Indian company shall not be taxable in India, if the same has been offered for tax in the UK, in pursuance to the tax treaty with the UK. Accordingly, it was also held that the Indian company shall not deduct any tax at source from the salary paid, provided it is satisfied that taxes have been paid in the UK.