Taxation of Expats
An Expatriate or expat is a person residing in a country, temporarily or permanently, which is different from his/her home country. This term is broadly used in the context of professionals/technicians sent by their companies to their associated enterprises or foreign subsidiaries. These people are different to those who are foreign citizen coming to India for employment, as those are called immigrants.
As provided in Section 9(1)(ii) of the Income Tax Act, a foreign expatriate working in India, the remuneration received by him, assessable under the head ‘Salaries’, is deemed to be Earned in India if it is payable to him for services rendered in India.
Irrespective of the residential status of the expatriate employee, the amount received by him as salary, for services rendered in India shall be liable to tax in India being income accruing or arising in India, and also be subject to TDS regardless of the place where the salary is actually received.
Where salary of an expat is payable in foreign currency, the amount of the tax deducted is to be calculated after converting the salary payable into Indian currency at the telegraphic transfer buying rate as adopted by State Bank of India on the date of deduction of tax (Rule26) read with Section 192(6) of Indian Income Tax Act.
It may be noted that this rule is applicable only for determination of Income Tax in TDS. However, in computing the salary income, the rate of conversion to be applied is the telegraphic transfer buying rate on the last day of month in which the salary is due or is paid as per Rule 15 of Indian Income Tax Act.
In simple words, both the Indian Salary as well as the Foreign Salary of an Expatriate is liable to Tax and Deduction of TDS
Grossing up of Income
There is such kind of agreement that the tax burden is on the company to which he/she sent and expatriate employee gets the net salary. This gives rise to the concept of grossing-up. an expatriate’s salary is to be considered as net salary + tax liability on it, as it has been borne by the company.
Now the maximum Rate of Income Tax is 30% and education cess is 3%, thus total tax rate is 30.9%. As it is bared by the company, so now company will have to calculate grossed-up tax on the net salary say Rs.100 in order to cover the total amount paid i.e. net salary as well as the tax burden for the purpose of computing tax liability.
Formula for grossed-up tax rate is:
30.9 × 100/ (100-30.9)
Now 30.9 is the maximum tax rate charged for an individual, earlier it was 33.99 due to presence of surcharge, which is not applicable for individuals anymore.
Through this formula we’ll get 44.71% rate of grossed-up tax, earlier which was 51.49% due to presence of surcharge.
If the tax rates are amended (i.e. taxes abolished or added), this formula would change accordingly.
Website : www.amitarun.com