In the recent past, the Indian government has majorly liberalized their economic policies, thereby making India one of the leading destinations for global investment. Owing to the lucrative opportunities, multinational enterprises often share their talent with companies across various jurisdictions via remote services.
Remote working, particularly across borders, has opened channels of legal complications for expats working in India. In this article, we will navigate the siginificant challenges and key considerations for companies and expats, regarding cross-border taxation vis-a-vis remote services operating in India.
What are the categories of Remote Service Providers?
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:
- Employment Contract: Based on the residency status and duration of stay in the nation, expats under employment contracts are subjected to income tax regulations in India.
- Service Contract as Freelancer: Herein, the service provider, working as a freelancer and is not necessarily a registered entrepreneur. They are subjected to Indian income tax depending on their residency and stay duration.
- Service Contract as a Business Entity: Alternatively, when the service provider operates as a registered entity, they may navigate tax requirements accordingly.
Furthermore, enterprises providing cross-border services also must deal with complex corporate tax issues alongside individual tax obligations. 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.
Circumstances Making Remote Service Providers as Residents
India’s taxation system relies on residency. The tax year in India runs from April 1st of a year to March 31st of the following year. The residential status of an individual/ 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:
Freelancer or foreign expats Providing Cross-Border Services – Specific provisions determine the residency status of an individual (freelancers or foreign expats) based on the income tax rules in India.
An individual is considered to be a resident in India under the following circumstances:
- If they stay in India for more than 182 days in a fiscal year or for more than 60 days in a fiscal year. Also, if they stay for at least 365 days in the preceding four fiscal years.
- If the individual has been a resident in India for at least two out of the immediately preceding ten fiscal years.
- If the individual has stayed in India for more than 729 days in the immediately preceding seven fiscal 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.
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 is liable to taxation based on their worldwide income derived from all sources, irrespective of their ownership by Indian or foreign nationals.
Non-resident companies are subject to taxation based on their income from either:
Business Connection in India: If they have a business presence or connection within India, they are taxed on the income generated from that connection.
Other Indian Sources: Income earned from other Indian sources (e.g., interest, royalties, capital gains) is liable to taxable.
Permanent Establishment: The Income Tax treaty between India and foreign authorities defines what constitutes a permanent establishment. If a non-resident company has one, it is subject to taxation in India.
NOTE: An individual's residency in India is determined by the duration (number of days) they physically stay within the nation, thereby facilitating a clear framework for tax assessment and compliance.
Income Tax on the Remote Service Providers with Resident Status
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 |
| Upto INR 3,00,000 |
0% |
| INR 3,00,001 to INR 6,00,000 |
5% |
| INR 6,00,001 to INR 9,00,000 |
10% |
| INR 9,00,001 to INR 12,00,000 |
15% |
| INR 12,00,001 to INR 15,00,000 |
20% |
| Above INR 15,00,000 |
30% |
Plus surcharge and education cess.
Foreign companies providing remote services in India are taxable only in situations such as being registered or having a place of management in India.
NOTE: The corporate tax rate is 22% plus surcharge and education cess for a resident company.
The resident foreign expats & freelancers and foreign companies are under an obligation to comply with the Income Tax Act 1961.
Income Tax on the Remote Service Providers having Non-Resident Status
The foreign expats and freelancers (non-residents) providing remote service in India are subjected to the income tax on the amount earned in India. The applicable income tax rates are as below:
| Income Tax Slab |
Income Tax Rate |
| Upto INR 3,00,000 |
0% |
| INR 3,00,001 to INR 6,00,000 |
5% |
| INR 6,00,001 to INR 9,00,000 |
10% |
| INR 9,00,001 to INR 12,00,000 |
15% |
| INR 12,00,001 to INR 15,00,000 |
20% |
| Above INR 15,00,000 |
30% |
Plus surcharge and education cess.
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 with permanent establishments in India are under an obligation to comply with the Income Tax Act 1961. The non-resident companies with only other income sources such as royalty, interest and dividends are not under the obligation to comply with the Income Tax Act 1961.
Scenarios in remote service providers inadvertently establish a permanent establishment for a foreign company in the country
The idea 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 has a fixed place of business in India or doing a company in India through:
- a place of management, branch, factory, workshop, office, warehouse etc.
- a construction site or building, installation or assembly project or supervisory activities in connection in addition to that where such site, activities, or projects continue for a duration exceeding 180 days, or
- furnish services for a time period exceeding 90 days.
- an agent (other than an independent agent) who habitually exercises the authority to conclude contracts or consistently deliver goods or merchandise or habitually secure orders on behalf of the foreign company.
If the foreign enterprise is considered to have a Permanent Establishment in India, the business income of such an enterprise attributable to the business conducted 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 (For instance, filling of tax returns) 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
Fixed Permanent Establishment (Fixed PE)
The Indian subsidiary company can be considered as a Permanent Establishment of foreign enterprise under the fixed place clause of Article 5(1) of the Income Tax Treaty between India and foreign jurisdiction. The following are the two conditions under which the foreign enterprise would be considered a Fixed PE in India:
- Foreign enterprise has a Fixed Place of Business in India.
- The foreign enterprise’ business is completely or partly executed.
Note: Any premise or space belonging to the Indian subsidiary at the disposal of the foreign enterprises, as a right can meet the requirements of Article 5(1) i.e., a fixed place through which the business is executed.
Agency Permanent Establishment (Agency PE)
The Indian subsidiary company can be considered as a Permanent Establishment of foreign enterprise 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 applicable if the agent is appointed by the foreign enterprise as a dependent agent in India.
An agent who is dependent and performs the following will be accounted as a PE of the foreign enterprise:
- Exercises an authority to conclude contracts on behalf of the foreign enterprise.
- Secures orders completely or almost completely for the foreign enterprise.
- Maintains the stock of goods or merchandise from which the agent consistently delivers on behalf of the foreign enterprise.
The following three conditions are necessary to establish an agent as an independent one:
- They must act in the ordinary course of their business.
- Their activities should not be devoted completely or almost completely on behalf of the foreign enterprise for whom they will function as an agent.
- The transactions between the foreign enterprise and the agent should be moderate.
Service Permanent Establishment (Service PE)
The Service PE is attracted by the foreign enterprise in India if the employees of the foreign enterprise furnish or perform 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 consumers in India constitutes a Service PE.
Navigating the taxation challenges for companies engaging in cross-border remote services can become a hassle and it is advised to seek comprehensive legal and tax advice. Understanding the legal nuances and staying updated on regulatory changes, while adhering to compliance strategies can be achieved.
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