Expat salary tax to be deducted at source

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The Supreme Court of India recently delivered a landmark judgment in the case of Eli Lilly (and various others) on the issue of deducting tax at source (TDS) on expatriate salaries. The decision finally puts to rest a long-debated argument on whether Indian tax deduction is required when an employee is working in India but paid from outside India, whether wholly or in part.

The issue before the Supreme Court was whether an Indian joint venture had defaulted on its obligations to withhold tax on the remuneration that was paid to its employees in a foreign country. Until now, expatriate employees showed only a part of their income in India, while the rest was paid outside the country by the foreign parent. The tax authorities argued that all of the employees’ income was taxable as the TDS provisions have extraterritorial operation.

The Supreme Court agreed that foreign companies must deduct TDS on expatriate salaries. The court also maintained that the Indian entities were required to deduct tax at source for the foreign salary portion as well as for the Indian salary portion. The court thereby set aside various high court verdicts that held that non-resident companies were not under statutory obligation to deduct TDS on salaries paid to their expatriates in foreign currency under section 192 of the Income Tax Act, 1961 (ITA).

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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in, lbhasin@vsnl.com or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.

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