This might scare foreign investors! MNCs get notice to stump up taxes on salary of expats

At a time when the Modi government is trying to woo global businesses, service tax authorities have issued notices to Indian arms of several multinational companies. They have been asked to stump up taxes on salary payments by their parent into expatriate managers' overseas bank accounts.

This could ignite a confrontation between the two sides.

A posting in India often qualifies as "expat terms" assignment at many MNCs in which Indian arms remit a portion of salaries of expats to the parent for transfer to employees' bank accounts back home.

Tax authorities are of view that this transfer should be taxed. They argue that the practice of transferring salaries for work done in India to foreign accounts by the parent company, which is later reimbursed by the Indian entity, makes it akin to supply of manpower. This makes it a service that needs to be taxed.

According to tax practioners, show cause notices have been issued to many firms across sectors, and if enforced, the tax claims could make it costlier for companies to employ expats in India.

Tax experts estimate that the total liability could run into hundreds of crores of rupees.

Since there is a "manpower supply service" rendered by a foreign company to the Indian entity, service tax should be paid on the 75% of the salary transferred to the parent, according to tax authorities.

They contend that since there is an import of service involved, the Indian company becomes liable to pay under a so-called 'reverse charge mechanism'.

There have been judicial pronouncements on the issue favouring companies, and tax authorities in some jurisdictions have even taken note of them by dropping tax demands.

But some fresh notices on the issue has left the industry confounded, although a service tax official played down the issue saying these notices could be recurrent ones.

But Indian tax regime has attracted lot of criticism in recent years, with investors and companies alike complaining about arbitrary and extreme interpretations of rules. Let’s read about some of the high profile cases:

1. British telecom giant Vodafone: The tax authorities imposed a demand worth billions of dollars on the company. When the government lost the case in court, it carried out a retrospective amendment to the income tax laws to force the company to pay the tax, a move that made headlines around the world and became a sore point with many international businesses.
2. The levy of minimum alternate tax (MAT): The tax on foreign portfolio investors raised a global outcry. The Narendra Modi-led NDA government that promised a stable and non-adversarial tax regime soon after taking over promised not to open fresh cases under the retro law and has accepted the high-profile panel headed by AP Shah to sort out the MAT issue in investors' favour.

India is home to tens of thousands of expat workers across sectors. According to a HSBC survey, sectors such as telecommunication, information technology and Internet businesses account for 21% of total expats working in India, followed by construction and engineering at 19%.

The 2014 survey pointed that 23 of expats working in India were from the UK, followed by the US 14% and Japan and Canada at 7% each.

Most multinationals employing expat managers in India follow a practice wherein around 25% salary is paid into Indian bank accounts, with the balance deposited in the foreign bank account of the employees.

For this amount, the Indian subsidiary of the multinational company requests its foreign parent to directly remit the amount in the employees' overseas bank account of the expat and the foreign company is paid the 75% cost by the Indian company. Tax experts say it's common for multinationals firms to post expat managers in senior positions at their Indian arms for which the local entity often issues employment letters.

(Image: Indiatimes)