India: Taxation of the Remote Service Provider
3 října, 2024
Over the past two decades, the Indian government has significantly liberalized their economic policies, making the country one of the most attractive destinations for global investment. This liberalization has led multinational enterprises to frequently share their talent pools with companies across various jurisdictions via remote services. Remote working, especially across borders, has created legal complications for expats working in India. In this article, we delve into the challenges and key considerations for enterprises and foreign expats concerning cross-border taxation related to remote services operating in India.
1. What are the different categories of remote service providers operating in the country?
Cross-border remote services raise a variety of legal and regulatory issues, particularly those involving taxation and social security. The enterprises and foreign expats engaged in remote work can fall under the following contractual categories:
Based on the Employment Contract: Depending on their residency status and length of stay in the nation, expatriates working under employment contracts are subject to Indian income tax regulations.
Service Contract as a Freelancer: In this scenario, the service provider, acting as a freelancer not necessarily a registered entrepreneur. They are liable for Indian income tax based on their residency and stay duration.
Service Contract as a Business Entity: Alternatively, the service provider may operate as a registered entity, navigating tax obligations accordingly.
In addition to individual income tax obligations, businesses providing cross-border services also have to deal with complex corporate tax issues. These complications might include the possibility of setting up a permanent establishment in India, which would affect their tax obligations. To ensure compliance with Indian regulations, individuals and companies alike must carefully consider the legal and tax implications of cross-border remote services.
2. Under what circumstances or situations does a remote service provider become a resident in the country?
India has a taxation system that is dependent on residency. The Indian tax year runs from April 1st of one year to March 31st of the following year. The residential status of an individual or company during the tax year determines their income tax liability. A system of residency-based taxation levies taxes on residents‘ income both domestically and internationally. Only the income received from the nation is subject to taxation for non-residents. The following situations allow the remote service provider to become a resident:
1. Freelancer or foreign expat Providing Cross-Border Services – The Income Tax rules in India provide specific provisions for determining the residency status of an individual, including freelancers or foreign expats. An individual is considered a resident in India under the following conditions:
(I) The individual stays in India for more than 182 days in a financial year or more than 60 days in a financial year and for at least 365 days in the preceding four financial years; and
(II) The individual has been a resident in India for at least two out of the immediately preceding ten financial years, and
(III) The individual has stayed in India for more than 729 days in the immediately preceding seven financial years.
Individuals who do not meet either of the conditions mentioned in point (i) (basic residency conditions) will qualify as non-residents in India. Individuals who meet the conditions in point (i) but do not meet the conditions in both points (ii) and (iii) (additional residency conditions) will qualify as not ordinarily residents in India.
2. Corporation having the Service Contract – A corporation is deemed to be resident in India if it is incorporated in India or the control and management are wholly situated in India. The resident company, whether owned by Indian or foreign nationals, is taxed on their worldwide income arising from all sources. However, non-resident companies are taxed on the income earned from a business connection in India or from other Indian sources under the Income Tax rules in India or a permanent establishment as defined under the Income Tax treaty between India and foreign jurisdictions.
In India, an individual’s residency is determined by the number of days they physically stay within the country, providing a clear framework for tax assessment and compliance. For companies, factors such as their place of incorporation, registration, or effective management determine their residency.
3. How is income tax assessed on a remote service provider who holds residency status in the country?
The resident foreign expats and freelancers providing the remote service in India are subject to the income tax on the global income. The applicable income tax rates are as below:
Income Tax Slab**
Income Tax Rate*
Up to EUR 3,333.33
0%
EUR 3,333.33 to EUR 6,666.67
5%
EUR 6,666.67 to EUR 10,000
10%
EUR 10,000 to EUR 13,333.33
15%
EUR 13,333.33 to EUR 16,666.67
20%
Above EUR 16,666.67
30%
* plus surcharge and education cess ** Euro rates based on exchange rate of INR 90 per EUR
Foreign companies providing remote services in India are taxable only in situations such as being registered or having a place of management in India. The corporate tax rate for the resident company is 22% plus the surcharge and education cess.
The resident foreign expats & freelancers and foreign companies are under an obligation to comply with the Income Tax Act 1961.
4. How is income tax assessed on a remote service provider who holds non-residency status in the country?
The non-resident foreign expats and freelancers providing the remote service in India are subject to the income tax on the income earned in India. The applicable income tax rates are as below:
Income Tax Slab**
Income Tax Rate*
Up to EUR 3,333.33
0%
EUR 3,333.33 to EUR 6,666.67
5%
EUR 6,666.67 to EUR 10,000
10%
EUR 10,000 to EUR 13,333.33
15%
EUR 13,333.33 to EUR 16,666.67
20%
Above EUR 16,666.67
30%
* plus surcharge and education cess ** Euro rates based on exchange rate of INR 90 per EUR
The non-resident company providing the remote service provider shall be taxable at the rate of 40% plus surcharge and education cess in case the said company has a permanent establishment in India. Apart from the income earned by the permanent establishment, the non-resident company is liable for tax on the following other incomes as below:
Nature of Income
Income Tax Rate*
Royalty
20%
Fees for Technical Services
20%
Dividend
20%
Interest
20%
* plus surcharge and education cess
Only the non-resident companies having permanent establishments in India are under an obligation to do the compliance with the Income Tax Act 1961. The non-resident companies having only other income such as royalty, interest and dividends are not under the obligation to do the compliance with the Income Tax Act 1961.
5. In what scenarios can a remote service provider inadvertently establish a permanent establishment for a foreign company in the country?
The concept of a permanent establishment is defined in the Double Tax Avoidance Agreement between countries and the Income Tax Act 1961. The remote service provider will be considered a Permanent Establishment in India (as per Article 5 of the Income Tax Treaty of India and foreign jurisdiction) if the foreign enterprise or foreign expat has a fixed place of business in India or doing a business in India through:
a place of management, branch, office, factory, workshop, warehouse etc. or
a building site or construction, installation or assembly project or supervisory activities in connection in addition to that where such site, project or activities continue for a period exceeding 180 days, or
furnish services for a period exceeding 90 days, or
an agent (other than an independent agent) who habitually exercises the authority to conclude contracts or regularly deliver goods or merchandise or habitually secure orders on behalf of the foreign company.
In case the foreign enterprise or foreign expats would be considered to have a Permanent Establishment in India, the business income of such foreign enterprise attributable to the business carried out in India becomes taxable in India under Article 7 of the Income Tax Treaty between India & foreign jurisdiction as a foreign company and would require to do all the compliances (such as filling of tax return etc.) as per Income Tax Act 1961 in India. The following are the main categories under which the foreign enterprise would be considered as a Permanent Establishment in India:
Fixed Permanent Establishment
Agency Permanent Establishment
Service Permanent Establishment
The remote service provider can be considered as a Permanent Establishment under the fixed place clause of Article 5(1) of the Income Tax Treaty between India and foreign jurisdictions. The following are the two conditions under which the foreign enterprise would be considered a Fixed PE in India:
Fixed Permanent Establishment (Fixed PE)
The remote service provider has a Fixed Place of Business in India;
Business of the report service provider is wholly or partly carried on.
Any space or premises at the disposal of the remote service provider as a matter of right can meet the requirement of Article 5(1) i.e., a fixed place through which the business is carried on.
Agency Permanent Establishment (Agency PE)
The remote service provider can be considered as a Permanent Establishment under the agency clause of Article 5(4) of the Income Tax Treaty between India and foreign jurisdiction. The agency clause of Permanent Establishment is applied if the agent is appointed as a dependent agent. The agent who is dependent and performs the following functions will be considered as a PE of the foreign enterprise:
Exercises an authority to conclude contracts on behalf of the foreign enterprise.
Secures orders wholly or almost wholly for the foreign enterprise.
Maintains the stock of goods or merchandise from which the agent regularly delivers on behalf of the foreign enterprise.
The following three requisites are necessary for establishing an agent as an independent agent:
He should be acting in the ordinary course of his business;
His activities should not be devoted wholly or almost wholly on behalf of the foreign enterprise for whom he is acting as an agent;
The transactions between the foreign enterprise and the agent should be at arm’s length.
Service Permanent Establishment (Service PE)
The Service PE is attracted if the remote service provider furnishes or performs services in India exceed the specified period. The employees of a foreign enterprise working in India for a period more than specified and the employment agreement in the name of the foreign enterprise established that the foreign enterprise through employees providing services to the customers in India constitutes a Service PE in India.
Overall, it is essential for companies engaging in cross-border remote services to seek comprehensive legal and tax advice to navigate these challenges effectively. This includes staying updated on regulatory changes, implementing robust compliance strategies, and ensuring that both employer and employee obligations are met to minimize potential risks and liabilities.
For further information, please contact:
Abhishek Hans, Partner
India Law Offices, New Delhi
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