With increasing trade relations between India and the World, cross-border movement of employees from and out of India has increased quite considerably. In India, employees enjoy the protection of diverse laws and regulations.
The business model of the companies is increasingly service centric and it is essential for employers to have the most efficient human resource and to grant them their legal rights and entitlements. However, in a country like India, the complex legal regime usually leave the employers facing typical issues related to interpretation of the large number of labour and employment laws governing the industry. These issues prove even more challenging when one of the parties involved is a foreign national.
Hence, this primer highlights the basic requirements of labour laws both from the perspective of Indian and foreign nationals employed in India. While throwing light on the appointment/ secondment of foreign nationals by Indian employers, the primer covers issues like taxation, working conditions, various social security benefits, issues related to termination of employees, importance and enforceability of non-solicitation clauses, retrenchment, various statutory registrations etc. With increasing concern for the security of female employees, employers have also been conferred with the duty to ensure protection against sexual harassment of women at the workplace.
Further, the primer also addresses the most common concern of all employers while entering into employment contracts, like the enforceability of clauses related to confidentiality, competition, poaching employees and soliciting clients. Keeping this in view, the primer would discuss the common controversies that arise from clauses in employment contracts and the caution that should be kept in mind in drafting an enforceable employment contract.
The key object is to enable the employers to familiarize themselves with the vast labour law regime of India.
CHAPTER 1: DEPLOYMENT OF FOREIGN EMPLOYEES
1.1 The deputation for expatriates and foreign nationals attracts several issues under the Indian legal system. Foreign nationals are engaged in India to provide training and development to local employees, for technology transfer, compliance of joint ventures and license agreements etc.
1.2 At the time of setting up a business in India, the foreign employer generally prefers to appoint its own employees for the management and control of the business. This is done in order to smoothen the transfer and execution of company policies to the Indian business arm. Further, it is convenient for the foreign employees working in India to co-ordinate with the parent company in terms of decision making, financial management and other business matters.
The major tax implications on a foreign and Indian national, working in India, and the liability of their employer under the Indian Income Tax Act, 1961 ('IT Act') are laid out below:
1.3 Residential Status of an Expat
An individual is taxed in India on the basis of their residential status under the IT Act. The residential status is determined on the basis of the physical presence of the individual in India during that particular financial year (1 April to 31 March).
The categorisation of the individuals on the basis of their residential status in a given financial year is done as follows:
- Resident in India –
- Resident and ordinarily resident (ROR)
- Resident but not ordinarily resident (RNOR)
- Non-Resident in India (NR)
Foreign nationals may be exempt from tax in India if their stay does not exceed 90 days, as prescribed in the Act, or the number of days prescribed (generally 183 days) under various double taxation avoidance agreements (DTAA) into which India has entered with other countries, subject to the satisfaction of all the other conditions.
However, in practise, an expatriate coming to India for the first time may remain RNOR for first 3 tax years. But the facts and circumstances may vary from case to case in determining the residential status.
Remuneration for services rendered by a foreign national employed by a foreign enterprise during his/her stay in India will be exempt from tax in India if:
- the total period of the stay in India does not exceed 90 days in a financial year
- the foreign enterprise is not engaged in any trade or business in India
- the remuneration is not charged to an employer subject to Indian income tax.
It may be noted that to the extent the individual qualifies for relief in terms of the 'dependent personal services' article of the applicable DTAA, there will be no tax liability. However, this exemption will not apply if the Indian entity is the individual's economic employer. In addition, any salary or local benefits received in India are also not eligible for relief.
1.4 Tax liability of an Employee
1.5 In respect of Indian employees-
- Under Section 192 (1) of the IT Act, employers are required to deduct income tax on the amount payable as salary to the employees at the rate as may be applicable in the relevant financial year.
- Employers also have an option to pay tax on behalf of an employee without making any deduction from her/his income, on the income in the nature of perquisites, which are not provided for by way of monetary payment.
- Section 200(1) of the Companies Act, 1956 prohibits a company from paying remuneration free of income tax. No company shall pay to any officer or employee thereof, whether in his capacity as such or otherwise, remuneration free of any tax.
- Employers can pay tax on non-monetary perquisites provided to their employees without making any deduction from his/her salary and the tax so paid by employer on behalf of the employee on non-monetary perquisites is exempt in the hands of employee under Section 10(10CC) of the IT Act.
1.4.1 In respect of foreign nationals-
1.4.2 Visa Requirements
- Employment visas are issued to foreigners who are working in India, for an Indian entity. Employment visas are usually granted for one year, or the term of the contract. It can be extended in India.
- Foreign national who wants to visit
India for employment in a company/ firm/organization registered in
India or for employment in a foreign company/ firm/organization
engaged for execution of some project in India, can obtain
employment visa provided that they are being sponsored for an
Employment Visa by their employer and they draw a salary in excess
of USD 25,000 per annum. The condition of annual floor limit on
income will not apply to:
- Ethnic cooks,
- Language teachers (other than English language teachers) / translators and
- Staff working for the concerned Embassy/High Commission in India.
- Employment visa is also granted to foreigners coming to India as a consultant on contract for whom the Indian company pays a fixed remuneration (this may not be in the form of a monthly salary), foreign artists engaged to conduct regular performances for the duration of the employment contract given by Hotels, Clubs, other organizations, coaches of national /state level teams, or reputed sports clubs, sportsmen who are given contract for a specified period by the Indian Clubs/organizations, self-employed foreign nationals coming to India for providing engineering, medical, accounting, legal or such other highly skilled services in their capacity as independent consultants provided the provision of such services by foreign nationals is permitted under law, engineers/technicians coming to India for installation and commissioning of equipment/machines/tools in terms of the contract for supply of such equipment/machines/tools, providers of technical support/services, transfer of know-how/services for which the Indian company pays fees/royalty to the foreign company.
- Embassy/Consulate may grant employment visa, which is valid for an year irrespective of the contract. Further extension may be obtained from MHA/FRRO in the concerned state in India. The visa duration starts from the day of issuance and not from the day of entry in India. Foreign technician may get visa for period of five years or the bilateral agreement between Indian and foreign government whichever is less with multiple entries. For highly skilled IT person visa validity is upto 3 years with multiple entries. Others can be granted visa with validity of two years with multiple entries.
- Indian Missions/ Posts may grant multiple entry project Visa to skilled or highly skilled foreign nationals coming to India for execution of projects. Project Visa will cover only professionals related to Power and Steel sector.
- Business visa is given strictly to those who make business related trips to India such as making sales or establishing contact on behalf of the company outside India.
- This is not applicable for people who are coming to India for part time or full time employment. The following activities can be carried out under a business visa: establishing an industrial/business venture or exploring possibilities to set up industrial/business venture in India, purchase/sell industrial products or commercial products or consumer durables, technical meetings/discussions, attending Board meetings or general meetings, providing business services support, recruitment of manpower, for performing duties as partners in a business and/or functioning as Directors of the company, consultations regarding exhibitions or for participation in exhibitions, trade fairs, business fairs etc., transacting business with suppliers/ potential suppliers at locations in India as buyer, to evaluate or monitor quality, give specifications, place orders, negotiate further supplies etc., relating to goods or services procured from India, acting as experts/specialists on a visit of short duration in connection with an ongoing project with the objective of monitoring the progress of the work, conducting meetings with Indian customers and/or to provide technical guidance, pre-sales or post-sales activity not amounting to actual execution of any contract or project, in-house training of trainees of multinational companies/corporate houses in the regional hubs of the concerned company located in India, internship on project based work in companies/industries for students sponsored by AIESEC, conducting tours and functioning as travel agents and/or conducting business tours of foreigners or business relating to it. Duration of business visa is only of 6 months.
1.4.3 Remuneration received by foreign expatriates working in India generally is assessable under the head "salaries" and is deemed to be earned in India. Income payable for a leave period that is preceded and succeeded by services rendered in India and that forms part of the service contract is also regarded as income earned in India. Thus, irrespective of the residence status of an expatriate employee, the salary paid for services rendered in India is liable to tax in India. There are no special exemptions or deductions available to foreign nationals working in India.
However, a foreign national who comes to India on short-term business visits can claim an exemption under the domestic tax law or a relevant tax treaty.
1.4.4 Where salary is payable in foreign currency, the salary income must be converted to Indian rupees. For this purpose, the rate of conversion to be applied is the telegraphic transfer-buying rate as adopted by the State Bank of India on the last day of the month immediately preceding the month in which the salary is due or paid. However, if tax is to be withheld on such an amount, the tax withheld is calculated after converting the salary payable into Indian currency at the rate applicable on the date tax was required to be withheld.
1.4.5 The remuneration received by a foreign national is assessable under the head 'salaries' and is deemed to be earned in India if it is payable to him for services rendered in India.
- There are certain exceptions to this
rule, few of them being the following:
- Remuneration of an employee of a foreign enterprise is exempt from tax if his stay in India is less than 90 days in aggregate during the financial year and is not liable to be deducted from the income of the employer. This is further subject to the provisions of Double Taxation Avoidance Agreement(s) ('DTAA(s)') entered by India with various countries.
- Remuneration received by a foreign expatriate as an official of an embassy or high commission or consulate or trade representative of a foreign state is exempt on reciprocal basis.
- Remuneration under co-operative technical assistance programme or technical assistance grants agreements.
- Where the income is derived by way of royalty or fees for technical services received pursuant to an agreement.
- In addition to the above, the Central Government has entered into DTAAs with various countries. As per Section 90(2) of the Act, in relation to an assessee to whom any DTAA applies, the provisions of the Act shall apply only to the extent they are more beneficial to the assessee. The provisions of the DTAAs prevail over the statutory provisions.
1.4.6 Registration with FRRO
Foreign nationals including their family members who intend to stay in India for more than 180 days have to get themselves registered with the Foreign Regional Registration Office (FRRO) within two weeks of arrival in India. For the purposes of registration, the individual is required to make an application in the prescribed form and be present in person at the time of registration. There is no registration fee charged for registration by FRRO.
1.4.7 What constitutes a Permanent Establishment?
- As per treaty laws, India cannot tax the business income of a foreign entity, unless that entity has a Permanent Establishment ('PE') in India.
- Article 7 of the various DTAAs stipulates that only the profits directly or indirectly attributable to the PE in India would be taxed in India. Therefore, only the PE generating income with a business connection in India will be taxable in India.
- The PE of the foreign enterprise in India may use its assets and resources to earn income both in India and outside India, but only the segment of Income that relates to the business connection in India is taxed. In the absence of business connection in India, the PE would just be a taxable entity and not a tax paying entity.
- A foreign company is generally considered to have a PE in India if the foreign company is regarded as having a fixed place in India through which the said foreign company carries on business in India.
- Under some DTAAs, a foreign company is regarded as having a PE in India, if the company renders services (Royalties or Fees for Technical Services) to an Indian company through employees or other personnel deputed to India and such services are rendered by its employees for more than a specified period of time. Such type of a PE is known as Service PE. Furnishing of services is the most important check for attraction of Service PE.
1.4.8 Secondment (employee loan/lease) by Parent Company to Indian subsidiary.
- The secondment of employees though may seem to be very simple, can lead to serious tax implications both for the Indian Subsidiary Company and the Parent Overseas Company.
- The tax obligations of the seconded employee working for Indian company depend upon various factors like the residential status he acquires while working in India, place where services are being rendered, receipt of salary in India or abroad etc. However the tax obligations of the Indian and Foreign employer may not end even if seconded employee has been subject to taxes in India for salary earned as seconded employee.
- A case of secondment of employees by
a foreign company may constitute a Service PE if:
- The foreign company retains the direct supervision and control over the seconded employees.
- The work being performed by the employees is on behalf of the foreign company.
- The foreign company is getting any amount over and above the mere re-imbursement of the salaries of the concerned employees.
- In the case of DIT (International Taxation), Mumbai Vs. Morgan Stanley and Co. Inc., the Service PE was held to be in place for the foreign company due to the reason that the services were being rendered by the seconded employees on behalf of the foreign company, the foreign company being responsible for the work performed by the seconded employees and that the seconded employees continued to have a lien over their employment with the foreign company.
- The Income Tax Appellate Tribunal
(ITAT) has laid down certain factors to hold that an arrangement
would not constitute a Service PE on account of following
- The services rendered are independent of and not under the control of the foreign company.
- The concerned employees are for all practical purposes, employees of the Indian company.
- The foreign company is providing only the personnel and not furnishing any services through the personnel.
- The reimbursement being made by the Indian company to the foreign company is only towards the actual cost of the salaries paid to the concerned employees and without any mark up.
The Indian company has the right to terminate the concerned employees from the services to the Indian company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.