The term expatriate is not defined in the Income Tax Act. The term means “a person residing in a foreign country. If we go by the meaning which is well assigned to the term expatriate under the income tax provisions and Double taxation avoidance agreements then, it means a person
- Residing in a foreign country say ‘’A’”
- Such residing may be temporary or permanent
- Such foreign country is different from his native country or country of legal residence say B
Hence, Mr. Tom citizen by birth of country B when comes to country A will be called as inbound expatriate in the tax jurisdiction of country A and outbound expatriate under the tax jurisdiction of country B.
The economies across the globe are observing globalisation at its full pace and swing. The two counterparts developed and underdeveloped nations have come forward to work hand in hand for the common good. Sharing of technologies in lieu of opening of market is the general fabric which enshrines in each foreign trade policy and international trade bi-lateral agreements.
In the aforesaid backdrop, there has been a tremendous increase in the movement of employees from one location to another across countries where the multination companies have their presence. A multinational company may send an expatriate to India either on a short-term business visit, as a consultant, or on a medium of long term assignment. Such sending may have different forms.
Hence, an expatriate on his visit to India or before negotiating an acceptance for secondment and deputation in India with his or her employer must be cognisant about the Income tax implications on the expected income. As not only it would have an impact on the cash pay-out but also, he she may be held liable for tax non- compliance. For Instance, as a non- resident he is liable to file return of income if his total income exceeds the maximum amount which is not chargeable to tax. The tax residency of an individual must not be confused with the citizenship. An expatriate non-resident who has been on a long-term assignments and long term secondment for say a period of 4-5 years must assess his tax residency status whether he is approaching towards the status of ROR or RBNOR. If he attains a status of ROR he would be liable to be taxed in India for his “global Income”
Under the provisions of the Income Tax Act, the tax incidence depends upon
- The residential status of the person subject to tax
- Place and time of receipt of income
- Place and time of accrual of income
- It is determined based on the physical presence of a person in India. The passport of the inbound expatriate provides for the sole and conclusive evidence in this regard.
- The residential status should be determined for each financial year. That means an expatriate may be a non-resident in India in one financial year but may be resident in another.
Under income tax an expatriate which is Individual may be either
- Resident and ordinary resident
- Resident but not ordinary resident
Question1: When an individual (here expatriate) would be regarded as resident in India?
Answer : An individual is regarded as resident in India in any previous year, if he is present in India for
182 days or more during that previous year; or
60 days* or more during that previous year and 365 days or more during the 4 preceding previous years.
However, in the above referred point b) 60 days to be read as 182 days in the following cases;
An Indian citizen leaving India for employment as crew member of ship
An Indian citizen or person of Indian origin employed abroad who comes on Indian visit.
Except the above two cases the general rule aforesaid shall follow.
Question2: When an individual (here expatriate) would be regarded as non-resident in India?
Answer: An individual who does not fulfil any of the conditions as enumerated above shall be regarded as non-resident in India
Question3: When an individual (here expatriate) would be regarded as resident and ordinary resident in India or resident and not ordinary resident in India ?
Answer: An Individual would be regarded as Resident and ordinary resident in India in any financial year if both of the following conditions are satisfied;
He has been resident in India for at least 2 out of 10 preceding financial years; and
He has been in India for 730 days or more during preceding 7 financial years.
A resident individual who does not satisfy either any one or both above conditions would be regarded as resident but not ordinary resident.
- Stay in the territorial waters of India shall be treated as presence in India.
- Entries in the passport are relevant while determining the residential status
Importance of determination of residential status of the individual
Section 5 of Income Tax Act 1961 expounds the basic law which clarifies the scope of income under the Indian law with respect to the status of individual in India in previous year. It provides residential status wise the incomes which are taxable in India. The determination of residential status is very pertinent while calculating the taxable income of the individual owing to following reasons;
- An individual whose status is Resident and ordinary resident are taxed on their global income under the Income tax law. Such global income may be Indian income or foreign income.
- An individual whose status is Non-resident are taxed only on the income which accrue arise in India and deemed to accrue arise in India and income which received in India and deemed to be received in India.
- An individual who is a resident but not ordinary resident is taxed in respect of the income which is received and deemed to be received in India, income which accrued and deemed to be accrue in India. He is also taxed in respect of income from a business controlled from India and profession set up in India but not received or accrued in India.
Refer bare text of section 5 of the income tax Act : Link
Disclaimer: The aforesaid writeup is for the general understanding of the readers. It does not render any professional advice or opinion.