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INTRODUCTION
India has the world’s second-largest labor force. However, employment laws in India are complex and influenced by international treaties and conventions. Courts often interpret foreign laws when they align with the Constitution and prevailing domestic laws. The applicability of foreign judgments depends on consistency, court competency, and jurisdiction.
SCOPE OF EMPLOYMENT REGULATION
Laws applicable to foreign nationals
All labor laws regulating employment relationships in India also apply to foreign nationals working in India. These include:
- Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act)
- Employees’ State Insurance Act, 1948 (ESI Act)
- Industrial Disputes Act, 1947 (ID Act)
- Maternity Benefit Act, 1961 (MBA)
- Payment of Bonus Act, 1965 (PBA)
Laws applicable to nationals working abroad
Indian labor law does not apply to Indian nationals employed by foreign entities abroad.
TAXATION OF EMPLOYMENT INCOME
Foreign Nationals
Foreign nationals are subject to income tax in India on all income derived from an Indian source or received in India, subject to double taxation treaties. Generally, salary income is taxable in India if services are rendered in India, except under Section 10(6)(vi) of the Income Tax Act, 1961, which provides exemptions if:
- The foreign enterprise is not engaged in any trade or business in India.
- The foreign national’s stay does not exceed 90 days in a tax year.
- The remuneration is not deductible from the income of the foreign enterprise taxable in India.
If a foreign national stays in India for 182 days or more in a tax year, they are considered a resident. Initially, they will be categorized as “not ordinarily resident,” meaning they will be taxed only on:
- Income received in India.
- Income accrued or arising in India.
- Income from a business controlled or a profession set up in India.
Once they become “ordinarily resident,” their global income becomes taxable in India.
Nationals Working Abroad
An individual who is “ordinarily resident” in India is taxed on their global income. However, if their stay in India is less than 182 days in a tax year, they are classified as non-resident and taxed only on Indian-source income, subject to double taxation treaties.
WHO ARE EXPATRIATES?
An expatriate is a person temporarily or permanently residing in a country other than their legal residence. In India, expatriates include both inbound (foreign nationals working in India) and outbound (Indian nationals working abroad) professionals.
ISSUES AFFECTING EXPATS
Taxation of employees working abroad on ships or aircraft
Under double taxation agreements (DTAAs), remuneration from employment aboard ships or aircraft in international traffic is taxed in the country of residence of the employer.
Taxation of director’s fees
Directors’ fees are taxed in the country where the company is a resident.
Taxation of accidental expatriates
An accidental expatriate is an employee who has unintentionally triggered tax obligations by spending extended time in another country. In India, staying for more than 182 days in a financial year can trigger tax residency.
Tax Residency Certificate
To claim relief under DTAAs, a Tax Residency Certificate (TRC) is required, obtained from the revenue authorities of the respective country.
Obligation to pay gratuity
Under the Payment of Gratuity Act, 1972, expatriates who complete five years of service in India are entitled to gratuity upon termination, retirement, resignation, or disablement.
SOCIAL SECURITY IN INDIA
Provident Fund Obligation
Social security in India is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, which includes:
- Employees Provident Funds Scheme, 1952 (PF Scheme)
- Employees Pension Scheme, 1995 (Pension Scheme)
- Employees Deposit Linked Insurance Scheme, 1976 (EDLI)
Applicability to International Workers
Since November 1, 2008, international workers, including:
- Indian employees working in countries with Social Security Agreements (SSAs).
- Foreign employees working for Indian establishments without SSAs.
Contribution for International Workers
Employers must contribute 24% of an employee’s monthly pay:
- 12% towards the PF Scheme
- 8.33% towards the Pension Scheme
- 3.67% towards the PF Scheme
Withdrawal from Provident Fund Scheme
International workers can withdraw accumulated balances upon:
- Retirement after 58 years
- Permanent incapacity
- Ceasing employment in India under an SSA
Social Security Agreements (SSAs)
India has signed SSAs with 17 countries, ensuring:
- Detachment (CoC) from social security contributions in host countries
- Equal treatment with nationals
- Exportability of benefits
- Totalization of periods for eligibility of pension benefits
JUDICIAL APPROACH TOWARDS EXPATS
Key Cases
- CIT v. Jaydev H. Raja
- The Mumbai High Court ruled that only actual tax reimbursement by an overseas employer is a taxable perquisite, not tax borne by the employee.
- Robert Arthur Keltz v. ACIT
- The ITAT ruled that only stock options related to services rendered in India during the vesting period are taxable.
- Sedco Forex International Drilling Inc v. DIT
- The High Court ruled that tax paid by an employer on behalf of an employee qualifies as a perquisite exempt under Section 10(10CC).
- Yoshio Kubo v. CIT
- The Court ruled that employer-paid taxes are non-monetary perquisites and exempt under Section 10(10CC).
- Eli Lilly & Co. v. CIT
- The Supreme Court held that TDS provisions under Chapter XVII-B apply to salaries paid abroad for services rendered in India.
The transfer of foreign employees to India is common in international relations. While concerns exist about employment rates, expatriates contribute to technology transfer and economic growth. The Indian government must balance the rights of foreign workers with economic interests, ensuring laws are flexible enough to permit work while managing population concerns. Proper regulation and judicial oversight are essential to address challenges faced by expatriates and safeguard their rights under Indian employment law.
