Many taxpayers cannot get the benefit of tax treaties

Many non-resident Indians (NRIs) want to keep their earnings in India, though they may be earning abroad. In case of an NRI, only income accruing in India or received in India or deemed to accrue in India is taxable in India, unlike in the case of a resident, whose worldwide income is taxable in India. Therefore, for an NRI who earns abroad, it is very important to ensure that her salary is not received directly in India, so that it is not taxable in India. Usually, one opens a bank account abroad in which the salary is first deposited before being remitted to India. A recent tribunal decision has eased the problem significantly for NRIs who may want their salaries transferred to India.

The decision was in the case of a crew member of a foreign ship who was hired by a Singapore ship management company to work on ships plying on international routes. The contract was issued by the Singapore company’s agent in India. The crew member was an NRI for the relevant year based on the number of days stayed in India. The salary was remitted directly by the company from its account in Singapore to the NRI’s non-resident (external) account with a bank in India.

The tax officer took the view that the salary was taxable in India, as the taxpayer was a resident of the country for the following reasons: he had other taxable income of pension and interest in India; the salary accrued in India since the contract was signed in India; and the salary was received in India since it was credited directly to a bank account here. The tribunal, however, held that merely because the taxpayer had some other taxable income in India did not mean he was a tax resident of India. Income accrued in India of non-residents is taxable in India, but that does not make them residents of India. Moreover, the taxpayer was not an Indian resident based on the number of days stayed here, which is the test for residence. The tribunal rightly held that signing of the contract in India did not mean that the salary accrued in India. The place where the services were rendered was the place of accrual for the salary—since the services were rendered abroad, the salary, too, accrued outside India. Addressing the tax officer’s contention that the salary was taxable in India as it was received in India, the tribunal took the view that “receipt” has to be considered in the context of the first occasion when the taxpayer gets control of the money—real or constructive control. Therefore, what is material is the receipt of income in its character as income, whether by the taxpayer or by his agent. There cannot be more than one receipt of income, and the same income cannot be taxed on multiple occasions.

In this case, the taxpayer had a right to receive his salary in Singapore, the location of his employer, and it was as a matter of convenience that he chose to have the money transferred to India. The money was at his disposal in Singapore, and it was in exercise of this right to dispose of the money that it was transferred to India. The tribunal drew a fine distinction between receipt of an income in India and receipt of an amount in India, holding that the salary amount was received in India but the salary itself was received in Singapore.

The tribunal placed reliance on a Madras High Court decision, which had taken a similar view in the context of a foreign pension transferred to India. It held that the foreign salary income was not taxable in India, though remitted to India.

Many NRIs want to remit their entire salaries to India, but have to necessarily open a bank account abroad to save themselves from the Indian tax net. This decision is helpful for NRIs who may have requested their employers to directly remit their salary to India, without opening a bank account abroad. Whether this decision will be accepted by the tax authorities, or whether they will choose to litigate this issue all the way up to the Supreme Court, as they normally do, will be known later.

Should the taxability of an income depend upon where the bank account is opened for this purpose? Double taxation treaties rightly grant the benefit of an exemption based on different conditions, and not upon which bank account the amount is credited to. Since tax treaties override domestic tax laws in India, a taxpayer who has the advantage of a tax treaty can opt for it, and not pay tax on such salary remittances to India by his foreign employer. Access to tax treaties requires a taxpayer residency certificate of the foreign country, which is at times a difficult or expensive proposition. Further, India may not have tax treaties with certain countries. Many taxpayers, particularly crew members of foreign ships or foreign airlines, cannot get the benefit of tax treaties, as they are not residents in a particular country for a long period. To encourage such taxpayers to remit their entire salary to India, the Central Board of Direct Taxes should consider issuing a circular accepting this tribunal decision, so that they are not put through the hassle of litigation, just because they have been loyal citizens, choosing to have their entire savings transferred to India.