Expatriate secondment to India, where employees of foreign companies are temporarily assigned to an Indian subsidiary or associated entity, is increasingly common due to the globalization of businesses. However, these arrangements bring a complex web of tax and regulatory implications that both businesses and employees need to understand.
Income Tax Implications
The primary concern is determining who the actual employer is for tax purposes. Indian tax authorities often view secondment as a service provision from the overseas company to its Indian counterpart. This perspective can trigger several tax liabilities. If the seconded employee is considered an employee of the Indian entity, their salary is taxable in India, and the Indian entity is responsible for deducting tax at source (TDS). The employee would also need to file an Indian income tax return, reporting their global income if they qualify as a resident in India under the Income Tax Act, 1961.
However, if the employee is considered to be employed by the foreign entity, the reimbursement of salary by the Indian entity to the foreign entity could be construed as Fees for Technical Services (FTS) or Fees for Included Services (FIS), which are taxable in India. Tax authorities may also argue that the foreign entity has a Permanent Establishment (PE) in India due to the employee's presence, making the foreign entity liable for tax on the income attributable to that PE. The Supreme Court has previously held that if the secondee maintains a lien on their employment with the overseas entity and remains on its payroll, it can be seen as a service PE, except for stewardship activities.
Goods and Services Tax (GST) Implications
The GST implications of expatriate secondment have been a subject of much debate and litigation. The central question revolves around whether the secondment constitutes a supply of manpower service. Recent judgments, such as the Karnataka High Court's decision in Alstom Transport India Limited vs. Commissioner of Commercial Taxes, have held that secondment does not amount to a taxable supply of manpower services under the GST regime, especially when the seconded employees are under the operational control and administrative authority of the Indian company.
However, this is a complex area, and the tax authorities have been known to issue notices demanding GST on secondment arrangements. To provide clarity, the Central Board of Indirect Taxes and Customs (CBIC) has issued circulars instructing tax authorities to assess secondment cases individually and to refrain from invoking Section 74 of the CGST Act unless there is clear evidence of fraud or willful suppression. Circular No. 210/4/2024-GST, dated 26.06.2024, clarifies that if full input tax credit is available to the recipient, the invoice value can be deemed as the market value, and if the related domestic entity does not raise an invoice for services received from its foreign affiliate, the value of such services may be deemed to be nil.
Other Regulatory Considerations
Besides income tax and GST, other regulatory aspects need consideration. These include:
Structuring Secondment Agreements
Given the complexities, it is crucial to carefully structure secondment agreements. Factors that can help establish that the secondee is an employee of the Indian entity include:
Understanding and addressing the tax and regulatory implications of expatriate secondment is vital for businesses operating in India. Careful planning, structuring of agreements, and staying updated with the latest regulations and judicial pronouncements can help mitigate risks and ensure compliance.
