International Taxation: A Comprehensive Overview of Direct and Indirect Tax Regimes

Direct Tax Under the International Tax Regime

Income Tax and Its Scope

Income tax is a fundamental form of direct taxation, imposed on individuals, Hindu Undivided Families (HUFs), and other taxpayers, excluding companies, based on the income received. A significant portion of income tax revenue is derived from cross-border transactions, expatriate employees, and Non-Resident Indians (NRIs). This aspect of taxation falls under the broader domain of international taxation or cross-border taxation.

Taxation of NRIs

The tax liability of an individual is primarily determined by their residential status in India. For NRIs, only the following types of income are taxable in India under Section 9 of the Income Tax Act, 1961:

• • • Income from business connections in India
    • Income derived from property, assets, or sources in India
    • Capital gains on the transfer of capital assets located in India
    • Salary earned in India, including rest periods that form part of an employment contract
    • Salary (excluding perquisites and allowances) paid by the Indian government to an Indian citizen working abroad
    • Dividends paid by Indian companies
    • Interest, royalty, or technical service fees earned under specific conditions

Taxation Slabs for NRIs
NRIs are taxed at the same income tax rates as resident Indians below 60 years of age, irrespective of their actual age. However, NRIs are exempt from filing tax returns in the following cases:

• • • If their taxable income consists only of investment income or long-term capital gains
    • If tax has already been deducted at source (TDS) on such income
    • Interest earned on certain specified savings and fixed deposit schemes
    • Dividend income from Indian companies, mutual funds, and Unit Trust of India
    • Long-term capital gains on listed equity shares and mutual funds (subject to Securities Transaction Tax)

Avoiding Double Taxation: The DTAA Agreement

NRIs may face double taxation if their country of residence also taxes the income earned in India. To mitigate this, India has signed Double Taxation Avoidance Agreements (DTAA) with over 88 countries under Section 90 of the Income Tax Act. DTAAs offer two primary methods of tax relief:

1. 1. 1. Exemption Method – Income is taxed in only one country.
      2. Credit Method – Income is taxed in both countries, but the resident country grants tax credit for the tax paid in the source country.

Taxation of Expatriate Employees

Expatriate taxation is determined by the individual’s residential status in India under Section 6 of the Income Tax Act and any applicable DTAA agreements. The tax implications are:

• • • Residents: Global income is taxed in India.
    • Not Ordinarily Residents (NORs): Taxed on income earned or sourced in India, as well as business income controlled from India.
    • NRIs: Only income received or accrued in India is taxable.

Tie-Breaker Rule in Case of Dual Residency

If an expatriate qualifies as a tax resident in both India and their home country, the Tie-Breaker Rule under the applicable DTAA determines their tax residency based on:

1. 1. 1. Permanent home – Location of the individual’s permanent residence
      2. Centre of vital interests – Country where personal and economic ties are stronger
      3. Habitual abode – Country where they usually reside
      4. Nationality – Country of citizenship
      5. Competent authorities’ decision – Mutual agreement between tax authorities of both countries

Exemptions for Expatriates Under the Tax Treaty

An expatriate may be exempt from taxation in India under certain conditions:

• • • Under the Income Tax Act (ITA)

      • The foreign company does not engage in trade/business in India.
      • The employee’s stay in India is less than 90 days in the financial year.
      • The salary is not deductible from the employer’s taxable income in India.

    • Under the Tax Treaty (DTAA)

      • The expatriate is present in India for less than 183 days.
      • The salary is paid by a foreign employer.
      • The salary is not borne by a permanent establishment in India.

Statutes Governing Cross-Border Taxation

• • • Income Tax Act, 1961
    • Foreign Exchange Management (FEMA) Regulations
    • National Tax Tribunal Act, 2005
    • Advance Ruling Authority under Section 245-O of the Income Tax Act

Indirect Tax Under the International Tax Regime

Customs Duty on Cross-Border Transactions

Customs duty is an indirect tax levied on the import and export of goods and services. It consists of:

• • • Basic Customs Duty (BCD)
    • Countervailing Duty (CVD)
    • Special Additional Duty (SAD)
    • Protective and Anti-Dumping Duties

Methods of Customs Valuation

Customs valuation follows specific methodologies under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007:

1. 1. 1. Comparative Value Method – Uses transaction values of identical goods.
      2. Deductive Value Method – Based on local sale price of similar goods.
      3. Computed Value Method – Uses material costs and profit margins from the country of production.
      4. Fallback Method – Combines the above methods for flexibility.

Goods and Services Tax (GST) in International Trade

Under the GST regime, cross-border transactions fall under Integrated GST (IGST).

Key GST Provisions for International Trade

• • • Exports are zero-rated, meaning exporters can claim refunds on input taxes.
    • Imports are subject to IGST and Customs Duties.
    • Supply to or from Special Economic Zones (SEZs) is considered an inter-state supply, making IGST applicable.

Definitions Under IGST Act, 2017

• • • Export of Goods: Taking goods out of India to a foreign country.

    • Import of Goods: Bringing goods into India from abroad.

    • Export of Services:

      • Supplier located in India
      • Recipient located outside India
      • Payment received in convertible foreign exchange
      • Supplier and recipient are not related entities

    • Import of Services:

      • Supplier located outside India
      • Recipient located in India
      • Place of supply is in India

Authorities Governing Indirect Taxation

• • • Central Board of Indirect Taxes and Customs (CBIC)
    • Authority of Advance Ruling (AAR)
    • Appellate Tribunal under GST

The international tax regime plays a crucial role in cross-border transactions. While direct tax laws ensure compliance with residency-based taxation, indirect tax laws regulate the import and export of goods and services through customs duties and IGST. The DTAA framework mitigates double taxation, and the Tie-Breaker Rule helps resolve dual residency conflicts. With evolving tax regulations, businesses and individuals engaged in cross-border activities must stay updated on compliance requirements and tax treaty benefits.

Disclaimer: This article has been prepared by the Astrea Legal Associates team, The content is for informational purposes only and should not be construed as legal advice. © 2017 Astrea Legal Associates LLP.