Increasingly, Indian companies are sending their employees overseas for business purposes, both long-term and short-term. In case of long-term secondments, employees are generally transferred to overseas entities. However, the employer and the employee face a challenge in case of short-term work-related visits like secondments and business travel vis-à-vis taxability overseas. Every country follows its own tax regime in respect of taxability of income namely residence-based or source-based. However, broadly speaking most countries retain the right to tax an individual on his income for the employment exercised in a particular country. Therefore, work-related visits need to be carefully monitored and examined based on the domestic tax laws of the overseas country as well as the double-taxation avoidance agreements (DTAA).
In order to avoid complications and provide some relief from taxability in respect of short-term work/business visits, the DTAAs provide for ‘short-stay exemption’ wherein an individual may claim exemption from taxation in the overseas country if certain conditions are satisfied. India has entered into DTAAs with many countries, most of which contain a specific provision for short-stay exemption under which individuals can claim exemption from taxation of the salary overseas. Let’s take the example of an employee working with an Indian company who visits the US for some work. The remuneration derived by the employee, being a resident of India, in respect of the US employment, shall be taxable only in India if he is present in the US for a period not exceeding 183 days in the relevant taxable year. Secondly, his remuneration should be paid by, or on behalf of, an employer who is not a resident of the US; and third, such remuneration is not borne by a permanent establishment or a fixed place or a trade or business which the employer has in the US. If these conditions are satisfied, then the individual won’t be subject to tax in the US on his remuneration received from the Indian employer and will be taxed only in India. Thus, short-stay exemption is an important concession, whereby the same income avoids double taxation in the two countries. It is, however, important to note that the conditions under the relevant DTAA should be carefully examined as there are variations in the same. For example, in case of the Indo-South Africa DTAA, the first condition of 183 days is to be read in the context of any 12-month period commencing or ending in the fiscal year concerned which, in effect, is different from the condition under Indo-USA DTAA specified above. In case, an employee is not able to claim the short-stay exemption, and his income is taxed both in India and overseas, then he should explore the possibility of claiming the tax credit in India for the tax paid overseas, subject to provisions of the relevant DTAA.