Working in India

ContentsIntroduction 3

Residency in India 4

Tax treatment of employee compensation 5

Income tax rates and tax compliance requirements 6

Social security 7

Wealth tax 8

Banking and remittance facilities for expatriates 9

Special remittance provisions 10

Visa and registration requirements for expatriates 11

PIO card and dual citizenship 12

Departure compliances 12

Personal baggage rules 13

1Working in India

Working in India2

IntroductionWhen you talk numbers, it is difficult to get bigger than this. India is the world’s largest democracy, with a population of more than 1 billion. From the Himalayas in the north to the Indian Ocean in the south, the Arabian Sea in the west to the Bay of Bengal in the east, the country is spread over 3.29 million square kilometer.

People speak more than 844 languages, while 23 of them are official. They follow varied customs and even more diverse traditions. India is representative of different faiths and is the birthplace of Hinduism, Buddhism, Jainism and Sikhism.

The country’s enduring institutions are rooted in the principles of democracy and justice. It’s a union of 28 federal states and 7 centrally administered union territories. The government is parliamentary, based on universal adult franchise.

Similar to the British model, there are two houses — an upper house called the Rajya Sabha and the lower house called the Lok Sabha.

The attached fact sheets have been designed to help expatriates understand India’s tax and applicable regulatory provisions. Although, this document provides a summary of issues, which may be of interest to expatriates coming to work in India, the information provided here should not be considered as a substitute for professional advice. On their arrival in India, the expatriates should seek professional guidance on tax implications, compliances and other relevant issues relating to the Indian assignment.

The attached fact sheets are correct to the best of our knowledge and belief as on 16 April 2009. However, the fact sheets are intended as a general guide only. Specific advice should be sought before acting on information contained in the fact sheets.

3Working in India

An expatriate’s Indian income tax liability is inextricably linked to his residential status. According to the tax laws, an individual is considered to be a tax resident if he is present in India for:

182 days or more in a tax year (Indian tax year extends from •1 April to 31 March), or

60 days or more in a tax year and 365 days or more during •the preceding 4 tax years

The 60 days may be extended to 182 days in certain cases.

The number of days for which an expatriate is physically present in India in a particular tax year and in prior tax years determines his residential status in India for that year.

Non-resident

The above-mentioned conditions are termed as the basic conditions of residency. If neither of these two basic conditions aresatisfied,theindividualisclassifiedasanon-resident(NR).

Takingtheclassificationfurther,therearetwokindsof tax residents:

Residentandnotordinarilyresident(RNOR);and•

Residentandordinarilyresident(ROR)•

Aresidentindividualwhosatisfieseitheroftheadditionalconditionsmentionedbelow,shallbeclassifiedasaRNOR:

The individual has been a non-resident in India in 9 out of the •preceding 10 tax years, or

The individual has been in India for 729 days or less during •the preceding 7 tax years

If an individual does not satisfy both these additional conditions, heisclassifiedasaROR.ARORistaxedonhisworldwideincome,whereasaRNORandnon-residentaretaxedmerelyonthe income sourced in India or income received in India.

Depending upon the residential status, the following income is subject to tax in India:

Residential status

Income received or deemed to be received in India

Income accruing/ arising in India or deemed to accrue/

arise in India

Income accruing or arising

outside India

NR

RNOR

ROR

Salary for services rendered in India is deemed to be India-sourced income and hence, is taxable irrespective of where the salary is received and the expatriate’s residential status. However, a safe harbour may be available under the Indian tax laws or the Double Tax Avoidance Agreement (DTAA) between Indiaandthehomecountryifcertainconditionsaresatisfied.ADTAAwillapplyincaseitsprovisionsaremorebeneficialthanthe Indian Income tax laws.

Typically,expatriateswhoareassignedtoIndiaforthefirst timewouldqualifyasRNORforthefirst2-3yearsoftheirstay in India.

Residency in India1

The number of days for which an expatriate is physically present in India in a particular tax year and in prior tax years determines the residential status in India for that year.

Under the rules of residence, an individual could be either a resident; or resident and not ordinarily resident; or non-resident.

1. Income Tax Act, 1961

P

P P

P

P PP

Working in India4

All expatriates are taxed on any compensation received for services rendered in India. Compensation would include salary, fees,commissions,profitsinlieuoforinadditiontosalary,advancesalary,allowancesandbenefitsinkind.

Broadly, the taxability of the typical components of an expatriate compensation package is summarized below:

Tax treatment of employee compensation

* A specific exemption is granted, subject to certain conditions, in respect of tax borne by the employer on non-monetary benefits provided to an employee.

** FBT — Fringe Benefits Tax — India had introduced FBT payable by employers on prescribed/deemed fringe benefits from the tax year 2005-06. However, for a company which is not liable to FBT, such benefits provided to the employees will be liable to tax in the hands of the employees as per the personal tax rules. Recently, the ambit of FBT has been widened to include Stock Based Incentive Schemes.

Description Taxable on full amount Taxed on a concessional value Exempt from tax

Base salary

All allowances other than those specifically considered below eg living allowance, hardship allowance

Bonus or commission/incentive

Housing allowance

Rent free accommodation

Furniture provided by employer

Temporary Accommodation on transfer

Utilities (electricity & water, servants)

Children’s education

Tax borne by employer*

Employer provided car with driver (subject to FBT)**

Reimbursement of specified relocation expenses (subject to FBT)**

Medical benefits (subject to FBT)**

Home leave travel (subject to FBT)**

P

P

P

P

P

P

P

P

P

P

P

P

P

P

Fringe benefits tax (FBT)

FBTistobeleviedontheemployerinrespectoffringebenefitsprovided/deemed to be provided by the employer to his employee(s).Suchfringebenefitsaregenerallynottaxableinthe hands of the employee. The provisions of FBT are equally applicable to foreign companies if they have employees based in India.

Stock incentive schemes2

Effective 1 April 2007, stock-based income has been brought under the ambit of FBT. The rules governing the taxation of such income are summarized below:

FBT will be levied on the employer with respect to any •allotmentortransfer(directlyorindirectly)ofanyspecifiedsecurities or sweat equity shares to its employees (including any former employee or employees).

FBT will be payable on the difference between the Fair •Market Value (FMV) of the securities on the date of vesting and the amount recovered from the employee.

For a company not listed on a recognized stock exchange •inIndia,theFMVwouldneedtobecertifiedbyaSecuritiesand Exchange Board of India (SEBI) registered Category 1 Merchant Banker in India. For a company listed on a recognized stock exchange in India, the FMV will be linked to the market price of the securities.

The amount subject to FBT will be considered as cost of •acquisition for computing capital gains tax in the hands of the employee at the time of sale of such securities.

The employer can recover the FBT from the employees.•

The FBT so recovered from the employees, is deemed to •be tax paid by the employee and may be eligible for credit overseas. However, the availability of credit needs to be confirmedbythehomecountry.

2. Income Tax Act, 1961 Working in India 5

Indian tax law requires all employers to deduct tax when paying salary to their employees and deposit the same with the authorities within seven days from the last day of the month in which such payments are made. Any failure on the employer’s parttodothiscouldattractstringentfinesandpenalties,inaddition to the taxes not withheld.

The tax rates for the year 2008-09 for an individual are mentioned below:

Income slabs (INR) Income tax

0 – 150,000 Nil

150,000 – 300,000 10%ofincomeinexcessofINR150,000

300,000 – 500,000 INR15,000plus20%ofincomeinexcessofINR300,000

500,000 – upwards INR55,000plus30%ofincomeinexcessofINR500,000

A surcharge of 10% is levied on the income tax for individuals wheretotalincomeexceedsINR1,000,000inthetaxyear 2008-09. Further, an education cess of 3% is levied on the income tax including surcharge in the tax year 2008-09.

For resident women, below the age of 65 years, the minimum incomethresholdisINR180,000.ForseniorcitizenstheminimumthresholdisINR225,000.

The tax laws offer relief to individuals in the form of certain deductions from their gross total income. These include investment in certain tax saving instruments, donations to charitable organizations etc.

Every individual, whose income is liable to income tax in India, is requiredtofileapersonalreturnofincome,withinfourmonthsfrom the end of the tax year.

Accordingly, the return of income for the tax year 2008-09 is requiredtobefiledby31July2009.Anydelayinfilingthereturn of income may attract interest and possible penalties.

India follows a system similar to that of the UK’s “Pay as you earn” scheme where the employer is responsible for deducting taxes at source from salary payments made to employees.

The expatriate is required to pay ”advance tax” on the income on which, tax is not withheld by the employer (typically personal income). The advance tax is payable in three installments due on or before 15 September, 15 December and 15 March each year.

Income tax rates and tax compliance requirements

Working in India6

e. Social Security Agreements have been signed with Belgium, France and Germany, but the date of “entry into force” is yet tobenotified

f. Every covered employer is required to contribute 24% (12% each of the employer and employee’s share) of the employee’s monthly “pay” towards the Provident and Pension Fund. The employer has an option to recover the employee’s share from the employee

g.LocalemployeesdrawingamonthlysalaryofINR6,500ormore are excluded from the purview of this legislation but this exclusion of the minimum pay does not apply to international workers. Therefore, in case of international workers, the contributions to PF are required even if the “monthly pay” of theemployeeexceedsINR6,500

Contributions to foreign social security schemes

Therearenospecificprovisionsforthetaxabilityof overseas Social Security contributions made by the employer forthebenefitoftheforeignnational.Specificanalysis,basisjudicial precedents, is required to determine the taxability of such contributions.

Social security taxes/contribution3

The Indian Provident Fund (Social Security) Scheme

a. The Ministry of Labour and Employment has issued a notificationextendingtheapplicabilityoftheIndianProvidentFundandPensionSchemeRulestoanewcategoryofemployees called “international workers”

b.Aninternationalworkerisdefinedas“anIndianemployeehaving worked or going to work in a foreign country with which India has entered a social security agreement and beingeligibletoavailthebenefitsunderasocialsecurityprogramme of that country, by virtue of the eligibility gained orgoingtogain,underthesaidagreement;anemployee,other than an Indian employee, holding other than an Indian passport, working for an establishment in India to which the act applied”

c. A covered establishment is:

An establishment employing 20 or more people engaged •inaspecifiedindustryornotifiedbytheCentralGovernment from time to time

Any establishment employing even less than 20 people •can opt to be covered voluntarily under the Act

d. Every covered employer will be required to make a contribution towards Provident and Pension Fund for international workers employed by it

3. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952

Social security

77Working in India

Incidence of wealth tax

The incidence of wealth tax on an individual depends on both the residential status and the nationality. A person is taxable in India on his global net wealth, if:

TheindividualisaRORinIndia(asdiscussedearlierinthis•document), and

He is an Indian national•

In all other cases, the individual is taxable in India only on assets located in India.

Rate of tax

Wealth tax is calculated as 1% of net wealth, which exceeds INR1,500,000on31Marchofagiventaxyear.

Assets

An individual’s ”wealth” includes:

Guest house, residential house or commercial building•

Cars•

Jewelry,bullion,goldandsilverutensils•

Yachts, boats and aircrafts•

Urban land•

CashinexcessofINR50,000(bankfixeddeposits •are excluded)

Specificexemptionsareavailableforsomeoftheseassets•

Wealth tax return

Theduedateforfilingthewealthtaxreturnis31July,thatiswithin four months from the end of the tax year (31 March). This isthesameastheduedateforfilingthepersonalreturn of income.

Wealth tax is chargeable for every year in respect of net wealth on the last date of the tax year, at the rate of 1% of the amount bywhichnetwealthexceedsINR1,500,000.

Wealth tax is chargeable for every year in respect of net wealth on the last date of the tax year, at the rate of 1% of the amount by which net wealth exceeds INR1,500,000

4. Wealth Tax Act, 1957

Wealth tax4

8 Working in India

Under certain circumstances, expatriates can remit their entire salary received in India

5. Foreign Exchange Management Act, 1999

General

Overtheyears,Indiahasliberalizedtheregulationsrelatingtoforeign exchange and remittance of funds from India. However, forcertainspecificremittances,priorapprovalsoftheexchangecontrol authorities are still required.

Residence

Thedefinitionoftheterm”resident”aspertheexchangecontrolregulationsisdifferentfromthedefinitionundertheIncome tax regulations. Therefore, although an individual may be a ”resident” as per the Income tax regulations, he may not necessarily be a ”resident” as per exchange control regulations.

As per the exchange control regulations, a ”resident” means a person residing in India for more than 182 days during the courseoftheprecedingfinancialyear,butdoesnotincludea person who has come to or stays in India, in either case, otherwise than:

fororontakingupemploymentinIndia;or•

forcarryingonabusinessorvocationinIndia;or•

for any other purpose, in such circumstances as would •indicate his intention to stay in India for an uncertain period.

In a nutshell, an individual would qualify as a non-resident in the firstyearofhisarrivalinIndia.Fromthesecondyearonwards,the following factors shall determine his residency in accordance with the exchange control regulations:

Terms of employment•

Natureofwork•

Duration of employment in India•

A person resident in India is required to take all reasonable steps to realize and repatriate into India all income accrued or due to him in foreign exchange, and such foreign exchange realized is required to be surrendered to an authorized banker in India within a prescribed time.

Bank accounts and remittance provisions

Foreign nationals can open bank accounts in India to credit their Indian earnings or receive funds from abroad to meet their normal living expenses.

Under certain circumstances, expatriates can remit their entire salary received in India.

Banking and remittance facilities for expatriates5

Working in India 9

A special remittance facility is provided to foreign nationals/Indian citizens who are resident in India, being employees of a foreigncompanyondeputationtotheoffice/branch/subsidiary/joint venture of such foreign company in India. Such employees have been permitted to open, hold and maintain a foreign currency bank account outside India and receive the salary from the overseas employer in the account, for the services rendered totheoffice/branch/subsidiary/jointventureinIndia,subjecttothe following conditions:

the amount credited to such account does not exceed 75% of •the salary accrued to or received from the foreign company,

the remaining salary is paid in rupees in India,•

Indian income tax is paid on the entire salary, as applicable.•

Apart from these, foreign nationals ”not permanently resident in India”(definedbelow)canrepatriateoutofIndia100%oftheirnetsalaryformaintenanceofcloserelatives.Apersonqualifiesas ”not permanently resident” in India, if he is employed in India:

foraspecifiedduration(irrespectiveofthelengththereof),•

orforaspecificjoborassignment(thedurationofwhich•does not exceed three years)

For other residents this amount is limited to USD100,000 per recipient per year.

A person may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquired, held or owned when he was a non resident in India.

Under a liberalized remittance scheme for resident individuals, which has been notified, total remittances of up to USD200,000 per calendar year are allowed for permissible current-account and permissible capital-account transactions subject to certain exceptions. The scheme allows individuals to acquire and hold immovable property or shares, maintain foreign-currency accounts or other assets outside India without RBI approval, subject to the fulfilment of specified conditions.

Special remittance provisions

10 Working in India

TheForeignExchangeRegulationsalsopermitthereleaseofexchange for meeting expenses for medical treatment abroad upon the estimate of a doctor in India or hospital/doctor abroad.

Nature of visa Purpose

Employment visa Persons intending to take up employment

Business visa Visiting India on business visits

Tourist visa Visiting India for tourism

Student visa Pursuing studies/academic courses

Entry visaOtherpurposesnotcoveredelsewhere(includingaccompanying families of foreign nationals)

Long term visaPersonsofIndianOriginwhohavenowobtainedforeign nationality

Yoga visaPersons interested in learning meditation or members of missionary organizations

Research visa Pursuitofresearchinanyfield

Transit visa Travelers passing through the country

Missionary visa Missionaries of registered charitable trusts

Journalist visa Media representatives

Conference visa Event organizers and visitors

A visa is required for all foreigners entering India

Visa and registration requirements for expatriates

Foreign nationals can secure visas to enter India in the applicable categories listed below:

ForeignNationalscomingtoIndiaforemploymentshallobtainan Employment visa from their home country. An Employment visaisinitiallyissuedforoneyearbeingsubjecttofulfilmentofcertain conditions. The visa can be extended in India for another year or for the period of the employment contract, whichever is earlier. The accompanying family members should travel on an Entry visa.

Generally, all foreign nationals holding a visa (other than a Tourist visa), which is valid for more than 180 days, must registerwiththeForeigners’RegionalRegistrationOffice(FRRO)within 14 days from the date of arriving in India. However, certainvisasspecifycertain“specificendorsements”forwhich, registration formalities are to be processed accordingly. Incities,whichdonothaveaFRROoffice,expatriatesmustregister with the local police station.

ThedocumentstypicallyrequiredforFRROregistrationare as under:

Copy of passport including Indian visa page•

Two copies of the letter of recommendation on the •letterhead of the Indian entity

Two copies of the letter of sponsorship on the letterhead of •the Indian entity

Eight passport size photographs, colored or black and white•

Copy of the lease deed of individual’s residential •accommodation in India or if residing in a hotel, a letter from the hotel

11Working in India

PIO card and dual citizenship

Departure compliances

APersonofIndianOrigin(PIO)cardcanbeobtainedbyanyexpatriatewhosatisfiesanyofthefollowingconditions:

The individual has held, at any time, an Indian passport,•

The individual or any of his parents, grandparents or great-•grandparents were born in and permanently resident in India,

The individual’s spouse is a citizen of India or a person of •Indian origin. This implies that even a foreign spouse of a citizen of India or of a person of Indian origin may apply for a PIOcard.

PIOcardholdersaregrantedcertainbenefitssuchas:

The waiver of the requirement to obtain a visa to visit India,•

Exemption from the requirement of registration if the •individual’s stay in India does not exceed 180 days,

The acquisition, holding, transfer and disposal of immovable •properties in India, and

Facilities to obtain admission to educational institutions •in India.

Before leaving the country, the foreign national, who is not domiciled in India, is required to furnish an undertaking to the prescribedauthorityandobtainaNoObjectionCertificateifheisin India for business, professional or employment activities. Such undertaking must be obtained from the expatriate’s employer or the payer of the income.

AnexemptionfromobtainingtheNoObjectionCertificateis granted to foreign tourists or individuals visiting India for purposes other than business or employment, regardless of the number of days spent by them in India.

For an individual domiciled in India, his permanent account number, the purpose of the visit outside India and the estimated time period for the stay outside India must be provided to the authorities. However, such individual may also be required to obtain a No Objection Certificate in certain specifiedcircumstances.

The Indian parliament has passed a bill to allow persons of Indian origin who are also citizens of one of the 16 listed countries to acquire ”Overseas Citizenship” of India without surrendering the citizenship of the other country. The benefit of dual citizenship was recently extended to all persons of Indian origin who migrated from India after 26 January 1950. Overseas citizens of India will be entitled to certain rights and benefits, as prescribed by the central government.

12 Working in India

Personal baggage rules6

AnexpatriateiseligibletoimportintoIndia,bonafidebaggage(explained under the Customs Act) which includes personal/ householdeffects(exceptcertainspecifieditemsincluding,alcoholic liquor/wines in excess of 2 liter, music system, colortelevision,etc.)andjewelryuptospecifiedlimits, freeofcustomsduty.Thisispermittedonabonafide transfer of residence, subject to the satisfaction of all of the following conditions:

The expatriate has lived abroad for a minimum period of •2 years immediately preceding the date of his arrival in India. Short visits made by the expatriate to India during the aforesaid period of 2 years shall be ignored if the total duration of stay on these visits does not exceed 6 months over the 2 year period.

Theexpatriatehasnotavailedtransferofresidencebenefits•in the preceding 3 years.

The above conditions shall also apply to unaccompanied baggage. In case of unaccompanied baggage, it is further required that the goods should have been in the possession of the expatriate abroad and shipped within a month of his arrival to India. The goods may also be received in India up to a period of two months prior to the arrival of the expatriate in India.

Further,allgoodsimportedasbonafidebaggageinexcessofspecifiedlimits(exceptmotorvehicles,alcoholicdrinks,goodsimportedthroughcourierservice)areclassifiableunderoneheading and are liable to a single rate of effective customs duty of 36.05%.

Certainspecifiedgoodsimportedasbonafidebaggage(forexample,VCR,washingmachines,laptop,etc.)areexemptfromthelevyofcustomsdutyincasesofbonafidetransferofresidenceoruponsatisfactionofspecifiedconditions.However,specifiedgoods(e.g.TV,airconditioners,musicsystems,home theatre system, etc.) attract effective customs duty at a concessional rate of 15.45% ad valorem, subject to satisfaction of certain conditions.

Furthermore, under the relevant rules, there are different exemption limits for baggage belonging to different classes of personscomingtoIndia.Theclassificationisbasedonage,duration of stay abroad, origin (Indian/foreign), country visited, etc. This exemption cannot be pooled with any other passenger. If the value of the baggage exceeds the exemption limits, then duty is calculated on the excess of such amount.

Even though there is no condition for a minimum period of stay in India for a passenger to avail of the concessions on transfer ofresidence,thebenefitisavailableonlyinrespectofbonafidebaggageonatransferofresidence.Further,toavailthisbenefit,generally, a declaration from the employer of the expatriate to the effect that his employment is being transferred to India is required to be submitted to the customs authorities.

General consideration

The goods imported by the expatriate should be accompanied by bills or invoices to facilitate their valuation to levy import duty and to claim duty drawback on their subsequent re-export. At the time of arrival in India, the expatriate is also required to declare the following lists to the customs authorities at the airport:

List of accompanying baggage•

List of unaccompanied baggage •

6. Customs Act, 1962

13Working in India

14 Working in India

15

Useful websites to visit:www.rbi.org.in• — for Foreign Exchange and ControlRegulationswww.mha.nic.in/fore_division.htm• — for visa related Informationwww.incredibleindia.org• — for information on Indian tourismwww.timesofindia.indiatimes.com/• — for news updates around the globewww.banknetindia.com/banklinks.htm• — for Directory of Bank Websiteswww.cbec.gov.in• — for Baggage rules

Working in India

Ouroffices

Ahmedabad2nd Floor, Shivalik Ishaan NearCNVidhyalaya,Ambawadi,Ahmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru“UB City”, Canberra Block12th&13thfloorNo.24,VittalMallyaRoadBengaluru - 560 001Tel: + 91 80 4027 5000, + 91 80 6727 5000 Fax: +918022106000(12thfloor) +918022240695(13thfloor)

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GurgaonGolf View Corporate Tower - BNearDLFGolfCourseSector 42Gurgaon – 122 002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

Hyderabad205,2ndfloorAshoka Bhoopal ChambersSardarPatelRoadSecunderabad - 500 003Tel: + 91 40 6627 4000Fax: + 91 40 2789 8851

Kolkata22, Camac StreetBlock‘C’,3rdfloorKolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

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JollyMakersChambersII15thfloor,NarimanPointMumbai - 400 021Tel: + 91 22 6749 8000Fax: + 91 22 6749 8200

JalanMillCompound95, Ganpatrao Kadam MargLower Parel, Mumbai - 400 013Tel: + 91 22 4035 6300Fax: + 91 22 4035 6400

New Delhi6thfloor,HTHouse18-20 Kasturba Gandhi Marg NewDelhi-110001Tel: + 91 11 4363 3000 Fax: + 91 11 4363 3200

PuneC-401,4thfloorPanchshil Tech ParkYerwada(NearDonBoscoSchool)Pune - 411 006Tel: + 91 20 6601 6000Fax: + 91 20 6601 5900

16 Working in India

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