Taxation

HighAir

This post is more for the people working on base of a „secondment agreement“, getting paid in India by a foreign company. I have some questions regarding taxation as I am keen to know the approx. net income that I will have in India.

First of all: There is a Double Tax Agreement between Germany and India. Furthermore my company allows me to choose how much income I want to receive in India and how much in Germany. I will not have any residential status in Germany, will be checked out completely.

As you may understand I would prefer to keep the part of my income that is paid in INR as small as possible, on a waterproof base for the kind of job I am doing, as the income tax in India seems to be quite high (30% plus?!). However there will be some “perks” like a company car and a surcharge for the rent of the flat. How to handle these? How much tax will I have to pay for this kind of “perks”? Is there any legal (!!!) chance of avoiding these taxes?

Does anybody have some hints or links to websites taking care of this topic?

I really look forward to receiving your reply.

Best regards,
Benjamin

Piper

Benjamin,
You generally have to pay quite a lot of tax on 'perks' too--however, most companies do 'tax equalization' so that the employee is no better, and no worse off than s/he would have been if s/he had not come to work abroad. Your best bet is to get your company to pay for tax preparation services for any year that you live in India but have residency in Germany. Tax prep of this nature (with one of the big companies) is pretty expensive ($3-$5k USD) but worth it to reduce the headache. Generally you will not be taxed in more than one place, but you have to fill in a lot of forms to make that happen. Also, make sure you keep track of all of your dates that you travel, and where the travel is to/from, and the purpose of the travel. This is required for tax filing.

Failing getting your company to pay for the tax filing, you can look into any online tax preparation services that are offered in your home country--many of these are quite good. As a last-ditch effort, you can ask around in the expat groups; they may know of an accountant that will do the filing for you, or you may want to approach one of the big companies yourself, even though the cost may be prohibitive (just have to get a quote and see).

KABAARY

That won't necessarily help you save on India tax. Salary related to employment in India is income which arises in India and, hence, the salary paid by the Indian company istaxable in India per the Indian Income Tax Act regardless of where the salary is paid. Article 15(1) of the DTAA with Germany also states that "salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable in the other Contracting State only if the employment is exercised there." (the other Contracting State, in your case, would be India). I am assuming, of course, that you would not meet the exception clauses in Article 15(2) which are as below :
a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned,
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State

At the highest slab rate, it is 30% income tax + 10% surcharge + 3% cess - so total effecive tax rate is 33.99%.

That would require a long answer and more details...let me see if I have the patience later to elaborate.

I would prefer to use the phrase "tax planning with a view to minimising tax incidence" rather than "tax avoidance". The Supreme Court, incidentally, had rendered a very erudite commentary on tax planning v/s tax avoidance many years ago in the case of McDowell & Co.

HighAir

Thanks Piper and Kabaary, you already helped me a lot.

Now it is clear to me that I will anyway have to pay taxes for my whole income in India, no matter on which bank account it goes. Plus point is, that I can receive everything in Euro.

33.99% however is quite a high rate. Especially as health insurance, retirement arrangements etc. will still come on top.

I really hope that you, Kaabary, will later on find the time to give me some hints regarding the "perks".
In detail my "perks" will be a surcharge for the rent of my flat. This surcharge will be paid to me monthly. Another "perk" will be a company car. Still have to check whether we will purchase or lease a car but anyway I will use it in my private time, too. Thus I think it must be considered as a "perk".

"Avoiding taxes" is deleted from my vocabulary now :-) Let's talk about "tax planning with a view to minimising tax incident" (repeating this for ours already to get it in my brain).

Have a nice evening,
Ben

KABAARY

You are from Germany for which country I have an extremely soft corner for certain reasons - therefore, I shall respond sometime or the other.

Not quite sure what you meant by this statement.

This also I did not understand. What do you mean by a "surcharge" ?

HighAir

Nice to hear that there is a soft corner for Germany inside of you. I don't know many foreigners thinking this way :-)

Sorry for the unclear statements. Tried some more or less direct translations from German. So let me explain more in Detail.

Here in Germany we have quit a big public social system. Contributions are directly deducted from our monthly salary. State pension scheme, health insurance, unemployment insurance and nursing insurance are directly deducted. As I move to India I will not have to pay this social insurances in Germany any longer. And as I understood they do not have such a system in India. But I will get some private insurances as replacement, especially health insurance and pension scheme.
So here in Germany roughly 45% of my gross income are kept by the state, I get paid 55% of my gross income as net income. Out of these 45% approx 25% are income tax. The remaining part belongs to the social security contributions and is obligatory.
So in India I will have to pay 33.99% taxes PLUS (voluntary) private social security contributions.

2nd point: "Surcharge". Just some figures as example. Imagine here in Hamburg I would have to pay EUR 500 as monthly rent. To get a similar flat in India I would have to pay EUR 1500 rent (this figures are not right, just examples). So my company would pay in adition to my salary EUR 1000 / month to get over the gap for the rent. This could either be paid to my account or directly to the landlord, my choise.

KABAARY

This is a rush job because I simply had to respond to your request – also, one would need entire facts (which I don’t have) to give a somewhat proper view.

I am assuming you will be in the high income tax bracket (taxable income of Rs. 1 million or above) – in that case bad news as there are limited options for saving tax through investments etc. In any case, since you would be an expat, you are unlikely to be interested in such options and, therefore, I have largely ignored them.

(A) For house, either (i) it will be leased by the company or (ii) you take it on personal lease from the landlord. In case of (i), lower of the amount of rease rental or 15% of salary will be treated as perk value. In case of (ii), least of the following will be exempt from tax :
(a) Actual amount of rent paid
(b) Amount by which rent paid exceeds 1/10th of salary
(c) 40%/50% of the salary (% depends on the city you stay in)

[Note : "Salary" mentioned above has a specific definition for the above calculation purposes and need not mean your entire salary package).

It may be more beneficial to go for self lease rather than company lease as in that case you save on a % of the lease rental being included as a perk as indicated above. Also, if the rent component in your salary is fixed, any rent you pay which is lower than your entitlement would result in the differential going into your pocket (net of tax of course) which would generally not be the case in case of company lease.

(B) Leave Travel Allowance (LTA) can be a component of your package. The LTA would be exempted from tax provided you actually spend this amount on travel fare (upto economy class air fare allowed) for self and dependant family. However, this exemption is available only for travel within India and only twice in a block of 4 calender years

(C) There are some allowances which are exempt from tax but the limits up to which they are exempt are negligible (eg. medical expenses reimbursement upto Rs. 15,000 p.a., transport allowance upto Rs. 9,600 p.a. etc).

(D) Presumably, your company will cover you and family with medical insurance. This will not figure in your taxable salary. Will your company do provident fund deductions ? If yes, the deduction will entitle you to a deduction upto Rs. 100,000 from your taxable income.

(E) Various expenses incurred by a company are subject to Fringe Benefit Tax (FBT). If possible try and get reimbursements from your company (I am assuming that your company is liable to FBT) for all such expenses on which FBT is payable as in that case they would not be considered as perks given to you and, hence, not included in your taxable income. Examples are, conveyance expenses, telephone expenses, travel overseas (as LTA exemption mentioned above is only for within India travel), company car and its repair expenses etc. Even if the company wants to pass on its FBT cost to you, the effective FBT amount is far lower than the tax rate on your salary.

Sorry....this is rather a top line and hurried overview...you may revert with specific queries, if any.

HighAir

Thank you very, very much. This really helped. At the moment there are no further questions from my side. At the moment...