Advisory to: Mr. ABC
An individual is having salary income in India & US in a financial year. This advisory is a discussion on tax liabilities in India and US vis a vis residency in India and tax exposure in the resident country if the salary is earned in other country. In other words, whether the individual should retain the status as resident of India during the said financial year.
Specific issue: Mr. ABC is working in an Indian branch of company from April 2019 to Feb 2020 and earning salary income in India With effect from March, 2020, he is being transferred to US branch of the same Company. Herewith, we discuss the taxability of ABC’s income if he is
a) resident in India or
b) non-resident Indian
- Agreement for avoidance of double taxation of income with USA. (herewithafter called “DTAA”)
- Indian Income Tax Act, 1961 (hereinafter called the “Act”)
Residential Status (Section 6 of the Income Tax Act, 1961)
Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies any one of the following conditions:
(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year.
If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions are not satisfied, the individual is a nonresident.
The following categories of individuals will be treated as resident in India only if the period of their stay during the relevant previous year amounts to 182 days. In other words, even if such persons were in India for 60 days or more (but less than 182 days) in the relevant previous year, they will not be treated as resident due to the reason that their stay in India was for 365 days or more during the 4 immediately preceding years.
(i) Indian citizens, who leave India during the relevant previous year as a member of the crew of an Indian ship or for purposes of employment outside India, or
(ii) Indian citizen or person of Indian origin1 engaged outside India in an employment or a business or profession or in any other vocation, who comes on a visit to India in any previous year. Since, in our case, ABC is Indian citizen who is leaving India for the purpose of employment. Therefore, he has to satisfy only the condition of staying more than 182 days India during previous year to be treated as Indian resident.
Scope of Income (Section 5 of the Income Tax Act, 1961)
Section 5 provides the scope of total income in terms of the residential status of the assessee because the incidence of tax on any person depends upon his residential status.
The total income of a resident assessee would, under section 5(1), consist of:
(i) income received or deemed to be received in India during the previous year;
(ii) income which accrues or arises or is deemed to accrue or arise in India during the previous year; and
(iii) income which accrues or arises outside India even if it is not received or brought into India during the previous year.
In simpler terms, a resident and ordinarily resident has to pay tax on the total income accrued or deemed to accrue, received or deemed to be received in or outside India.
A non-resident’s total income under section 5(2) includes:
(i) income received or deemed to be received in India in the previous year; and
(ii) income which accrues or arises or is deemed to accrue or arise in India during the previous year.
Note: All assessees, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas residents alone are chargeable to tax in respect of income which accrues or arises outside India.
Article 16 of the DTAA Section 90(1) of the Income Tax Act, 1961 give powers to central government to enter into agreements with foreign countries to grant relief from payment of Income Tax chargeable under the Act to promote mutual economic relations, trade and investment.
India-US have entered into such agreement, Article 16 of which reads as under:
A non-resident’s total income under section 5(2) includes:
1. Subject to the provisions of Articles 17 (Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments received by Professors, Teachers and Research Scholars), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. .If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State, if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an enterprise of a Contracting State may be taxed in that State.
Analysis of above-mentioned Article 16:
From the above reading it can be ascertained that an individual having income by way of salary is chargeable to tax only in the country in which employment is exercised, i.e. salary income earned in India is taxable in India (or vice-versa).
The income by way of salary earned in the country other than resident country of individual is chargeable to tax in resident country only if the following 3 conditions are simultaneously satisfied:
- His stay in the other country is not more than 183 days in a financial year.
- His employer is not a resident of that country.
- The remuneration is not borne by the permanent establishment or fixed place of business of the employer in that country.
This can be understood with help of an example:
Suppose an individual is resident in India for the Financial Year 2019-20. In such case, as per the India US DTAA, the entire remuneration as a result of employment in India is taxable in India whereas the salary income of US is taxable in US itself. However, the salary income earned in US is taxable in India only when:
- The individual stays for less than 184 days in US
- The individual’s employer is not a resident of US
- The remuneration is not borne by the permanent establishment or fixed place of business of employer in US.
In the case under discussion, the 3rd condition is not being satisfied since the employer is having a branch in US from which the salary is being paid to ABC. Thus, the tax on Income earned in US would be taxed in US.
The tax implication on ABC in two difference scenarios is discussed below
A) ABC is resident of India during FY 2019-20 (i.e. his period of stay in India is more than or equal to 182 days)
It is important to note that as per Income Tax Act total income of resident Indian shall include the global income whether received in India or not. Therefore, in this case, ABC shall have to declare his global income in his return of income i.e. 11 months of salary in India & salary for a month earned in USA. However, the salary earned in US shall not be taxed in India by virtue of operation of Article 16 of India US DTAA as discussed above. In other words, the salary earned in US shall be exempt in India. For claiming this exemption, the assessee shall have to produce proof of having paid taxes in US for that particular month.
It has been assumed that the salary income earned in US is received in bank account maintained in US.
B) ABC is non-resident Indian during FY 2019-20
In this case, Mr. ABC is non-resident Indian for the Financial Year 2019 by the virtue of Section 5(2) as discussed above. Thus, his total income shall only include income accrue or received in India i.e. salary of 11 months and he is chargeable to tax only in respect of such income. Assuming ABC’s residential status for the salary earned in India for the months of Jan, 2020 and Feb, 2020 is resident of US, his salary income earned in India during the two months shall not be taxable in US by virtue of operation of Article 16 of DTAA.
Thus, Mr. ABC’s tax liability in India in any case is only restricted to tax payable on salary earned in India. The salary earned in US shall be taxable in US by virtue of operation of Article 16 of DTAA and shall not be taxable in India in either of the cases.