Tuesday, May 27, 2008

Law Street in The Economic Times -May 2008

Hi Readers,

This time, "Zenobia Aunty" whom you are all well acquainted with, did suffer from the writer's block. Fortunately an excellent decision read favourable to the tax payers) of the Delhi Tribunal which impacts global employees came to the rescue.
Around the word in eighty days, has taken a new meaning altogether and the world is flatter than what even Thomas Friedman envisaged. So read on. Meanwhile, I wish I was sailing in this hotair balloon, don't you? Click on the title below to access Economic Times online. Else simply read on or read maadi, as it is said in Bangalore (Bengaluru).

And this post also gets a mention in Kay Bell's Tax Carnival. Hurrah!

So go ahead and spot this column and read up on many others.



Employees on the go…
Zenobia Aunty is rarely tongue tied, or let us put it this way, she never ever faces a writers block. She always has a lot to say, whether it be through spoken or written communication.

Well, this weekend, we experience what the writers block was all about. I sat motionless for hours together, waiting for Zenobia Aunty to dictate her column to me. Alas, we ran up several drafts, but the topic kept changing. Right from why Bush was blaming us for our Aloo Tikka burger and saying it led to spiraling food prices in his country, to whether or not the barter system would replace monetary currency. It was truly a step back into the dark ages for us, more so, with the power shortage which Bengaluru is exposed to, off and on, especially during the summer months.

Zenobia Aunty wished she was in the cooler climes of Iceland. But alas, only global mobile employees have all the fun she said, referring to our neighbour – Chris who shuttles between Finland, China and India. Chris, doesn’t agree. Imagine having to deal with the tax authorities of three different countries, he sighs. His greatest nightmare is that he will get a tax notice from these countries, which cumulatively is higher than even his total annual salary!

It is quite common for talented employees such as Chris to take responsibility for several countries and to spend time in different countries managing different entities in these various countries. Fortunately, for Chris, the Delhi Tax Tribunal has taken a correct view.

Even more fortunately for both Zenobia Aunty and myself, a tax partner of the firm this columnist is currently employed in, provided much food for thought (or let us say food for the column).

For those who are residents but not ordinary residents in India, whose contract of employment clearly defines the split of services, the Tribunal has held that salary for services rendered outside India is not taxable in India.

Under the Income Tax Act, 1961, (the Act), the scope of taxable income varies with the residential status of the individual. The Act prescribes two tests of residence for individual taxpayers. Each of the two tests relate to the physical presence of the individual in India in the course of the ‘tax year’. An individual is said to be a resident in India in the tax year, if he is: (a) physically present in India for 182 days or more in that tax year; or (b) physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years.

If either of the tests is not satisfied, he will be considered as ‘non resident’. Additionally, an individual, who is defined as a resident in a given tax year is said to be ‘not ordinarily resident’ in any tax year if he has been a non-resident in India in 9 out of the 10 preceding tax years or has been in India for less than 730 days during the 7 preceding tax years. Therefore, under the Act, an individual may be classified as a resident and ordinarily resident (ROR); resident but not ordinarily resident (RNOR); or a non-resident (NR).

A RNOR is liable to pay tax in India, only on Indian income, i.e.: income received or deemed to be received or income accruing or arising or deemed to accrue or arise in India. Salary income for services performed outside India under a split contract, where such services do not relate to Indian operations does not fall within the above definition.

Of course, if the residential status of the person, even if he is a global employee, is that of a ROR, he would be taxed on his worldwide income in India. But, global employees who keep shuttling from country to country for not very long assignments; this is rarely bound to be the case.

Let us go back to the facts of the Delhi Tribunal decision. Here, the terms of employment between Air France and the assesses (in this case), required that they spend 80 per cent of their time in managing operations in India, 5 per cent of their time in South Asia and 15 per cent in France. The contract of employment itself clearly recognised the division of services to be rendered in India and outside India. The Tribunal held that it could not be said that the period of employment outside India should also be considered as services rendered in India.

In fact, even as our politicians keep fighting on whether or not a North Indian can sell vada pav’s in Mumbai, global mobility is on the rise. In fact, India Inc benefits from foreign talent.

A lot has been written on global acquisitions, on greater access to new geographies, better access to high quality raw material, and in short greater efficiency. The fact of the matter is that the world is flatter than what even Thomas Friedman had originally envisaged. Globalisation whether inbound or outbound, will result in expats coming to India and sharing their expertise.

One can say, sharing of global talent is what the future holds. Properly structured employment agreements, will help Chris and others, concentrate on their work, instead of having unwarranted nightmares. This decision is a step in the right direction, and substantiates the provisions of the Act.

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