Entire salary taxable during split employment contract?
August, 19th 2008
John, a British citizen, is employed with a company in UK. He is posted to India. As per the terms of the employment contract, John is required to manage operations in UK and in Singapore. John is required to spend 85% of his time in India, 10% in UK and balance 5% in Singapore. He receives salary of GBP 100,000 per annum.
John arrives in India on 1 April 2007 for the first time (he has never visited India in the past). The details of his physical presence in India, UK, Singapore April 1, 2007 to March 31, 2008 is.
Total number of days in the financial year 366 Number of days in India 311 Number of days in UK 37 Number of days in Singapore 18
The question is whether the entire salary of John is taxable in India.
As per the provisions of the Indian tax laws, salary earned for services rendered in India is taxable in India irrespective of the place of receipt of salary and residential status of the individual.
In the above case, salary received by John for the period he was in India and rendered services in India (ie for the period of 311 days) would no doubt be taxable in India.
The question that arises is whether John will be taxable in India on salary received for services rendered in UK and Singapore?
John was physically present for more than 181 days in India and this is his first visit to India. He will qualify as a Resident but Not Ordinarily Resident (NOR) during the financial year 2007-08. NORs are taxable in India only on their Indian sourced income (ie income earned or directly received in India)
The salary for services rendered in UK and Singapore was neither received in India nor earned for services rendered in India. Also the salary received is not in respect of leave or rest period which is succeeded or preceded by John for service rendered in India. Accordingly, salary received outisde India for services rendered outside India cannot be said to be taxable in India.
Based on above example, the extent of salary taxable in India is as under
Salary per annum (A) GBP 100,000 Total number of days in the financial year (B) 366 Total number of days in India (C) 311
Taxable amount A/B*C
Salary income taxable in India GBP 84,973
In case John was present for more than 729 days in 7 financial years preceding the financial year 2007-08 and he was a resident in 2 of the 10 financial years preceding the financial year 2007-08 he would qualify as a Resident and Ordinarily Resident (ROR). RORs are taxable in India on their worldwide income. In which case, the salary for the full year would be taxable in India. Therefore, tax implications on salary under a split employment contract would vary depending upon the residential status and would need to be examined on a case to case basis. In this context, it would be pertinent to examine the residential status of the individual under the provisions of the relevant Double Tax Avoidance Agreement.
So while opting for a split employment contract, it would be a good idea to keep the following points in mind:
The employment contract recognizes the division of work to be performed in India and in countries outside India; The employment contract should preferably indicate the % of time required to be spent in India and outside India; Documentation to be maintained to substantiate that the work done outside India has no connection with the services rendered in India; and Passport copy would indicate the number of days spent in India and outside India