Developments with India Tax
Update on the tax developments in India relating to Provident Fund, Permanent Establishment, and E-filing.
- Confusion continues about the evolving Provident Fund rules, in particular the scope of wages subject to contribution.
- Historically, employee contributions to India Provident Fund were 12% of ‘Basic Salary’. Basic is a uniquely Indian concept, not to confused with ‘Gross Salary’ or ‘Base Salary’. Typically, in most India compensation packages, Basic Salary is less than half of regular compensation, with other cash benefits such as ‘Dearness Allowance’, COLA, Housing allowance and other benefits making up the balance of an employee’s typical pay packet. The Indian Supreme Court and the Employee Provident Fund Organization ruled that contributions are due on basic salary PLUS allowances. Thus, practically all compensation and allowances are subject to the 12% provident fund contribution, unless excluded under a specific clause such as a rent allowance.
- Many employers in India have been slow to implement the new rules and are continuing the practice of applying the 12% contribution to basic salary only.
- We will likely see some elements of compensation that are exempt from contribution, but many allowances will be part of the contribution base.
- The India Tax Authority has a very strict interpretation of Permanent Establishment or PE. This is true under domestic tax law as well as under treaty interpretation. India PE exposure is especially of concern for any global mobility program with employees inbound to India.
- A recent Delhi Income Tax Appellate Tribunal case - Telenor ASA vs. DCIT (ITA 1307/Delhi/2015) - from August 2021 highlights the issue. In this case, the tax authorities can look to aggregate the presence of company employees from interconnected and sequential service projects when determining whether the company has a permanent establishment in India.
- The tax recommendation is to assume that assignees inbound to India will likely trigger corporate PE issues, and your corporate tax team should be involved to mitigate and plan for this corporate tax exposure.
- Individual tax compliance with the Central Board of Direct Taxes (CBDT) for the current tax filing season for the 2020/2021 tax year has had some problems.
- This was the first year for a new E-filing system to submit tax returns via a tax compliance portal. The returns for the tax year ended March 31, 2021 would normally be due July 31, 2021.
- With hiccups with the new e-filing system, the due date has been postponed twice, with the latest extended due date of Dec 31 Many taxpayers reported having technical problems with the e-filing process.
- It is likely we will see waivers of late filing penalties for those who had trouble submitting their tax return.
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