Summary of this article
Extended India stay can trigger tax residency for H-1B employees
Global income taxation arises once residency thresholds under Indian law are met
Remote work may expose US employers to India permanent establishment risk
PE exposure invites corporate tax, filings, transfer pricing and withholding compliance
Where employees of US-based enterprises are required to remain in India for extended durations, the arrangement raises nuanced tax considerations for both the individual employees and their foreign employers, necessitating a careful evaluation of the applicable Indian tax and regulatory framework.
Residency Triggers Global Tax
From the standpoint of individual taxation, an H-1B visa holder who is physically present in India for 182 days or more during a financial year may qualify as a “resident” under the Income-tax Act, 1961. “Upon meeting this threshold, the individual’s global income may become chargeable to tax in India, subject to the provisions of the applicable tax treaty and the availability of foreign tax credits,” says Keshav Singhania, head- private client, Singhania & Co.
From an employer's perspective, the continued presence and work-related activities of such employees in India require a detailed analysis to determine whether such activities could give rise to a taxable business presence in India for the foreign employer, including the potential constitution of a permanent establishment or business connection under domestic tax law and relevant Double Taxation Avoidance Agreements (DTAA).
“A person who otherwise would have easily qualified as a non-resident in India, due to an extended stay, is exposed to being regarded as a resident Indian and possibly being taxed on his/her worldwide income,” says Savani.
India Presence Triggers Tax Exposure
Any such person who is employed in a US company and conducts/undertakes any activities for the said US company while staying in India for a period exceeding 90 days in any 12-month period would be at high risk of the said US company establishing a permanent establishment (PE) in India. “In the event the US company is considered to have established a PE in India, the income attributable to such PE would be subject to tax in India at 35 per cent and open up a Pandora’s box of tax issues like filing of tax returns, withholding tax, transfer pricing, etc.,” says Kunal Savani, partner, Cyril Amarchand Mangaldas.
“It is also pertinent to note that the issue of H-1B professionals continuing to render services remotely from India owing to delays in visa stamping is currently being addressed through cautious, interim compliance structures,” says Singhania. These arrangements are largely risk-mitigation measures and should not be viewed as reflecting a settled legal position or regulatory endorsement.
