On 1 February 2020, the Indian Finance Minster presented the 2020 Union Budget with the central theme of ensuring economic development for all sections of the society. The announcements include several changes to the tax law that impact both internationally mobile employees, as well as the local employee population.
We highlight some of the key considerations for international mobile employees below:
New personal tax regime
The new optional tax regime allows taxpayers to benefit from lower tax rates, however on forgoing certain deductions /exemptions such as house rent allowance (HRA), investment linked specified deductions, premium paid for health insurance, medical insurance, donations, etc. For employees on assignment to India, as the exemptions are typically less common, the new regime may result into reduced tax costs for the employee and to the business as well in case the employee is tax equalised.
For employees leaving India on a tax equalised assignment, consideration should be given as to which regime to be applied for hypothetical tax purposes. Calculations will be required to be reviewed basis the pre-assignment income and other benefits, to correctly capture the pre-move position.
Change in residency conditions
Residency rules for Indians living and working overseas have been tightened. The Budget 2020 has proposed to reduce the period of stay criteria for Indian citizens/Person of Indian origin (POI) visiting India, to determine their residential status. They will now qualify as residents if their stay in India is:
- 120 days or more (earlier limit was 182 days) during the financial year
- 365 days or more during the preceding four financial years.
Further, it has been proposed that the Indian citizens who are not liable to tax in any other country by virtue of residency, domicile or any other similar criteria, would be deemed tax residents of India. However, the government has clarified that income earned outside India shall not be taxed in India for such deemed residents unless it is derived from an Indian business or profession.
For employees who have moved to US and may undertake trips back for personal and business purposes, this may result in additional India tax implications.
Deferred tax on share of eligible start-up companies
As part of long-term incentives, start-ups provide their employees with stock options (ESOPs) which are exercisable against issue of equity of start-up on fulfilling vesting criteria. The objective is to retain highly talented employees and make them participate in the equity growth of the start-up. The existing law provides for two points of taxation, ie as a perquisite in the year of exercise of option and as capital gains in the year of sale of shares.
Employees often faced a cash flow issue at the time of exercise of options, as the benefit was received as a non-cash perquisite whereas the employer was liable to withhold taxes on such benefit.
In order to ease the cash flow burden on employees of eligible start-ups, the Budget has proposed to defer the deduction and payment of taxes on such perquisite. Eligible start-ups would now be required to deduct and pay taxes within 14 days from either expiry of five years from the end of the relevant financial year or date of sale of such securities, or date on which an individual ceases to be an employee, whichever is earlier. However, the tax liability will still be determined by employer based on the tax rates in force in the financial year when the option was exercised.
Other key changes
Provident Fund and other retiral schemes
It has been proposed to introduce an overall cap of INR 750,000 on deduction for Employer’ contribution to Provident Fund (PF), National Pension Scheme and Superannuation Fund. Hence, Employer's contribution over and above this limit is proposed to be taxed as perquisite in the hands of employees. Further, annual accretion to such funds by way of interest, dividend, etc., on contribution in excess of INR 750,000 would also be taxed as perquisite.
This amendment may have huge impact on inbound assignees to India on employment since the PF contribution is mandatorily applicable on entire gross salary. Also, in many cases, the assignees are equalized on the Indian PF contribution. Post amendment, employer’s share of the PF contribution which exceeds INR 750,000 will be considered as a taxable perquisite for the employees, resulting in higher tax outflow.
Liberalized Remittance Scheme (LRS)
The government has proposed to levy additional tax in the form of Tax Collected at Source (TCS) at the rate of 5% on remittances of INR 700,000 or more in a Financial Year (FY) outside India under LRS through an authorized dealer. The LRS includes foreign remittances for the purposes such as studies /medical treatment /maintenance of family /holidays /Investments etc. abroad. The rate of TCS would be 10% in case the individual does not have a Permanent Account Number (PAN) or Aadhaar Number.
This amendment is also likely to impact inbound assignees since all the aforesaid remittances under LRS from their Indian bank account to overseas bank account would attract tax at 5% which will be collected by the authorised dealer. The assignees would be eligible to claim this as a credit at the time of filing their tax returns, which may result in a tax refund situation.
Abolition of Dividend Distribution Tax (DDT)
Currently, companies are required to pay DDT on the dividend declared, distributed, or paid to shareholders at the rate of 15% plus applicable surcharge and cess. The Budget has proposed to abolish DDT for dividends declared, distributed or paid on or after 1 April 2020. Consequently, dividends will be subject to tax in the hands of the shareholders in all cases and at the applicable tax rates. Also, the Indian company would be required to withhold taxes at 10% where the dividend payout exceeds INR 5,000. The withholding will be at 20% where the shareholder does not have a Permanent Account Number.
This would benefit the foreign shareholders as they may avail credit in their home countries with respect to the tax withheld in India (no credit for DDT was available under earlier regime).
Direct tax amnesty scheme
Encouraged by the success of the indirect-tax Sabka Vishwas (Legacy Dispute Resolution) scheme, a new direct tax amnesty scheme ‘Vivad Se Vishwas' has been proposed with a view to reduce tax litigation. The scheme proposes full waiver of interest and penalty if the disputed tax amount is paid by 31 March 2020. The scheme shall remain open till 30 June 2020, but the amnesty will only be partially available for payments made after 31 March 2020.
This is a good opportunity for companies and individuals to evaluate the tax positions in pending tax litigation and avail this opportunity.
Visit Grant Thornton India for more detail on the full Union Budget 2020 announcements.
For global mobility services questions and advice on this announcement, please contact:
Global mobility services leader
Grant Thornton India LLP