Budget 2022: Need to address challenges faced by expatriates

As February 1 draws closer, various professional and industry bodies as well as the media swings into action each year to put forth the wishes/challenges of taxpayers before the Finance Minister. Last year, impact from the pandemic presented a unique challenge for expatriate employees employed overseas who would be subject to India taxation.  

India is a major source of talent for the world and the number of people moving overseas for employment is significant. On account of the pandemic, this workforce was either stuck in India on account of the lockdowns in either countries (i.e., country of residence or country of employment), or preferred to voluntarily stay in India to meet personal exigencies, or had to await sanction of new visas. While in India, these employees continued to be on overseas payroll and rendered services from India. Thus, on account of their prolonged stay in India and based on the tax provisions, these employees created a taxable presence in India.  

Relevant tax provisions  

A person can be subject to India taxes if his stay in India is beyond the tax exemption thresholds. The tax treaties generally have a 183-day threshold for claiming exemption from taxes in any country, which is subject to additional conditions.  

On account of the prolonged stay of the individuals in India, they have to pay taxes in India on salary earned for services rendered in India. As the overseas employer was not able to file the tax withholding returns in India, these employees would need to pay India taxes through advance tax mode. 

These individuals continued to be subject to tax withholding overseas. Thus, in effect, the individual pays taxes in two jurisdictions, impacting the take home pay. India does have double taxation avoidance agreements with more than 90 countries by which double taxation can be minimised if not eliminated. However, double taxation is generally claimed in the tax return and grant of this relief is a prolonged process.  

Challenges faced by expatriates in claiming relief  

The tax treaties provide an avenue to claim relief from double taxation. However, the process is long and cumbersome for the taxpayers. Some of the challenges faced by individuals are as follows-  

• Firstly, the taxpayer is required to compute income (that is subject to double taxation) and the taxes suffered thereon to claim foreign tax credit (FTC), which is not always an easy task. Difference in fiscal years of the two jurisdictions impacts this calculation as the overseas tax return may not be finalised and hence, accurately estimating the tax obligation for overseas income within the tax filing due date is difficult. This makes filing a revised return with accurate details imperative. However, as the timeline for filing a revised return is now reduced, it is not always possible to file the revised return for the taxpayer within the prescribed due date. Differences in the FTC claimed when noted at the time of an audit invite interest and penalty. Hence, a request to restore the due date for filing the revised tax return to one year from the end of the assessment year.  
• Another issue is the documents that are required to be submitted for an FTC claim. There is Form no. 67 which is to be filed along with the proof of payment of taxes or an overseas tax residency certificate. As explained above, when filing the original tax return, the overseas taxes may not have been paid and thus, there is a challenge in making a correct declaration. 
• Lastly, when the central processing centre (CPC) is processing the tax returns, generally the FTC claim is denied at the first instance and a demand is raised. Thus, the taxpayer needs to file a rectification application reiterating the claim. At times, the matter may reach the appellate authorities if there is a dispute on the quantum of credit claimed. Therefore, upgrading the CPC systems to process the tax returns with FTC claims correctly will help ease unnecessary troubles for the employees.  

 
Conclusion  

Given that claiming FTC relief is not an easy matter, taxpayers are put through undue hardship when attempting to claim treaty relief. Hence, it would be a welcome move if the Budget addresses some of these challenges.  

Views are personal. The author is partner, Deloitte India

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