Tax on Employment

Presented by
CA Naveen Wadhwa, GM - R&D,
Taxmann
Right to tax the employment income

 Source v. Residence Based of Taxation

 Conflict between the two Rules

 Bifurcation of Rights
India Domestic Tax Laws
Right to Tax

As per Section 9 of the Income-tax Act, income which falls

under the head "Salaries" shall be deemed to accrue or
arise in India, if it is:
 Earned in India.

 Payable by the Government to a citizen of India for

service outside India
India Domestic Tax Laws
Exemption From Tax
An individual (not a citizen of India) exempt from tax if
remuneration received by him as an employee of a foreign
enterprise for services rendered by him during his stay in
India if:
 Foreign Co. isn’t engaged in any business in India

 Stay of employee in India <= 90 days

 Remuneration is not deductible from income of employer

taxable in India
OR
 Remuneration in connection with training in any
undertaking owned by the Govt.
DTAAs – Basic Rule
 General Rule - Tax in the Country where employment is
actually exercised.

 It is exercised where employee is physically present to

perform services.

 What about Remuneration paid after termination of

employment.

 Example, Gratuity, leave encashment, bonus, etc.

DTAAs – Basic Rule
Tax on Remuneration paid after termination of
employment

 Remuneration paid after termination of employment for

work done before such termination will be considered to
be derived from the State in which the employment
activities were exercised.
DTAAs – Basic Rule

How to tax the ‘Severance Payment’ not calculated by

reference to the period of past employment?
DTAAs – Basic Rule
Tax on Severance Payment

 Severance payment, not calculated by reference to the

period of past employment with the employer, should be
considered to be remuneration covered by the Article for
the last 12 months of employment, allocated on a pro-
rated basis to where the employment was exercised
during that period.
DTAAs – Basic Rule

How to tax the ‘Punitive Damages’ or ‘Damages for

Injury to One’s Reputation’?
DTAAs – Basic Rule
Tax on Punitive Damages

 Punitive damages or damages awarded on grounds

such as discriminatory treatment or injury to one's
reputation should be treated under Article 21, i.e.,
Residuary Clause or Other Income.
DTAAs – Basic Rule

How to tax the ‘Non-Competitive Compensation’ not

related to the employment?
DTAAs – Basic Rule
Tax on Non-Competitive Compensation

 Non-competitive compensation received following the

termination of an employment is often time and
geographically limited. Whilst such a payment is not
related to the employment, it will be taxable in the State
where recipient resides at the time the payment is
received.

 However, if payment is for the activities performed during

the employment, the payment should be treated under
Article 15.
DTAAs – Exceptions to General Rule
Three Exceptions – Cumulative Conditions
 Stay in Source State <=183 Days in any 12 month period
commencing or ending in the fiscal year concerned

 Remuneration is paid by an employer who is not resident

of the other state.

 Remuneration is not borne by the PE.

DTAAs – Exceptions to General Rule
Condition 1: Stay Test
 Arrival in India on January 1, 2018
 Departure from India on July 10, 2018

The employee will be deemed to be present for a period

exceeding 183 days during the 2017-18 and 2018-19.
DTAAs – Exceptions to General Rule
Condition 1: Stay Test
 Stay in India in 2017-18: 90 Days
 Stay in India in 2018-19: 101 Days

The employee will be deemed to be present for a period

exceeding 183 days during the 2017-18 and 2018-19.
DTAAs – Exceptions to General Rule
Condition 1: Stay Test
While calculating the ‘Days of Physical Presence’ include
following:
 Part of a day
 Day of arrival

 Day of departure

 Saturdays and Sundays

 National holidays

 Short breaks

 Days of sickness (unless it prevents the individual from leaving and

he would have otherwise qualified for the exemption).
However, days spent in the State of activity in transit in the course of a
trip between two points outside the State of activity should be excluded
from the computation.
DTAAs – Exceptions to General Rule
Condition 1: Stay Test
While calculating the ‘Days of Physical Presence’ exclude
following:
 However, days spent in the State of activity in transit in the course of
a trip between two points outside the State of activity should be
excluded from the computation.
 Days during which taxpayer is a resident of the source State

Year 1: Mr. A is Resident of State S (stay 200 days)

Year 2: Mr. A is resident of State R

In Year 2, Mr A is sent to State S for 90 days, his stay of 200 days in

Year 1 shall not be considered. Thus, condition met.
DTAAs – Exceptions to General Rule
Condition 2: Deduction Test

 The second condition is that the remuneration is paid by

an employer who is not resident of the other state.
 Does it means that employer should be resident of
resident country?
 OECD suggests that partner countries can have
alternate language

the remuneration is paid by, or on behalf of, an employer

who is a resident of the first-mentioned State, and
DTAAs – Exceptions to General Rule
Condition 2: Deduction Test

 In case of ‘Fiscally Transparent Entity’.

 Treaties don’t treat ‘Partnership Firm’ as separate legal

entity, but domestic laws do.

 Difficulty - If partners reside in different States

 Resolution Through MAP, i.e., State in which partners,

who own the majority in the entity, reside (i.e. the State
in which the greatest part of deduction will be claimed).
DTAAs – Exceptions to General Rule
Condition 3: PE Test

 If employer has a PE in the State in which the

employment is exercised, the remuneration is not borne
by that PE
 That test would be met even if no amount were actually
deducted as a result of the PE being exempt from tax in
the source country or remuneration is not deductible
because of its nature
DTAAs – Exceptions to General Rule
In Nut-Shell

 The 2nd and 3rd exception is not intended to apply where

employment services are rendered to an enterprise
which is subjected to tax in a State either because it is
carried on by a resident of that State or because it has a
PE therein to which the services are attributable.
DTAAs

Contract for Service v. Contract of Service?

DTAAs
How to Distinguish between two?

 Whether services rendered by individual constitute an

integral part of the business of the recipient enterprise
 Which enterprise bears responsibility or risk for the
results produced by the individual's work
 Who has authority to instruct individual regarding the
manner in which the work has to be performed
 Who controls and has responsibility for the place at
which the work is performed
DTAAs
How to Distinguish between two?

 Whether remuneration of individual is directly charged by

the formal employer to the enterprise to which the
services are provided
 Who puts the tools and materials necessary for the work
at the individual's disposal
 Who determines the number and qualifications of the
individuals performing the work
 Who has right to select individual to perform the work
and to terminate the contractual arrangements entered
into with that individual for that purpose
DTAAs
How to Distinguish between two?

 Who has the right to impose disciplinary sanctions

related to the work of that individual
 Who determines the holidays and work schedule of that
individual
 Thanks

For More Information, Visit: https://taxmann.com/

Get in touch with us on Social Media:

Facebook

Twitter

Linkedin