Indian employees working overseas often face litigation over taxation of their overseas salary income, if such salary is received in India. This is because a non-resident can be subjected to tax in India on that portion of the income which is received in India.
The Income Tax Appellate Tribunal (ITAT) which adjudicates tax matters, in a recent decision, has held that merely because the salary was credited by the Singapore-based employer company to the employee’s NRE bank account in Mumbai, it will not trigger a tax incidence in India. The ITAT sought to distinguish between ‘income’ received in India and an ‘amount’ received in India.
The ITAT relied on earlier judicial pronouncements and held that salary income is a compensation for services rendered by an employee. Thus, salary income in the hands of the non-resident employee cannot be taxed in India, if the services are rendered outside India. The place of receipt of the appointment letter is immaterial.
However, the income tax authorities pointed out that the money was received in India, as the salary cheques were credited by Executive Ship Management Pte — the Singapore employer — to the NRE ( non-resident external rupee) account maintained by the employee Arvind Singh Chauhan with HSBC Bank in Mumbai. Thus, it should be taxable in India in his hands.
Under tax laws, the tax incidence is based on the concept of residence, which in turn depends on the number of days stayed in India. A tax resident of India is subject to tax on his global income. However, a non-resident is subject to tax in India only under two situations, one of them being that income received in India is taxable in India. In this case, the employee who was working on a ship plying on international routes was a non-resident as he had spent less than 182 days in India during the relevant financial years relating to the matter being heard by the ITAT.
The ITAT rejected the contention of the tax department that the salary amount credited to the bank account in India should be subject to tax. It observed that the employee had a lawful right to receive the salary amount at the place of employment (which is the location of the foreign employer outside India). The ITAT held: “The connotation of an income having been received and an amount having being received are qualitatively different. The salary ‘amount’ is received in India in this case but the salary ‘income’ is received outside India”.
Gautam Nayak, partner, CNK & Associates, said, “The ITAT in this order has highlighted a new aspect relating to income received in India. It has drawn a distinction by holding that salary income was not received in India as the employee had the lawful right to receive salary outside India. The salary amount was at the employee’s disposal outside India and he merely exercised his right to transfer it to India.”
India, with 1.42 crore migrants, is among the leading exporters of manpower, according to latest UN statistics. A large chunk of them constitute blue-collar workers. The practice of a salary credit either in full or in part to a bank account in India is more common in case of highly skilled workers.
“Employee agreements should be properly structured. If these agreements bring out the point that the salary for services rendered overseas is being credited to a bank account in India, at the employee’s request for the sake of convenience, this ITAT decision could help mitigate litigation” explains Nayak.