Global Mobility Tax Concerns in India: What Employers Need to Know

The economics behind global mobility can be both compelling and strategically well placed. This has invariably led to employers moving their workforce to locations with more attractive opportunities. But for employees this could be a prove to be a double whammy, with taxes from home and host country might be applicable.

Walking the tightrope between home and host tax jurisdictions can be extremely tricky without the proper planning and a clear understanding if tax implications. For employers this means successfully navigating domestic tax laws, Double Taxation Avoidance Agreements (DTAAs), mounting regulatory scrutiny and other pressing concerns. Additionally, the distinction between legal and economic employers continues to trigger Permanent Establishment (PE) concerns, which are now under increased scrutiny by Indian tax authorities.

In this blog, we examine the tax responsibilities for Indian employers that are managing globally mobile talent and how to avoid common pitfalls.

Understanding Tax Residency and Global Mobility under Indian Law

Global mobility is no longer limited to top-level executive relocations. Today, it covers everything from project-based assignments and long-term secondments to cross-border remote work arrangements. For employers, one of the first steps in achieving compliance is understanding how to determine an employee’s tax residency status.

Tax Residency Law

Under the Income Tax Act, 1961, India classifies individuals/employees based on their physical presence in the country:

1. Resident: To be considered a resident in India, one must be present for at least 182 days during a financial year, or for 60 days in the year along with a total of 365 days over the preceding four years.
2. Resident but Not Ordinarily Resident (RNOR): Those who qualify as residents but haven’t been in India for 9 out of the past 10 years or haven’t spent 729 days or more in the last seven years.
3. Non-Resident: Anyone not meeting these thresholds is considered a Non-Resident.

Special rules apply to Indian citizens and Persons of Indian Origin (PIOs) visiting India, with relaxed thresholds to avoid unintended tax residency classification during short trips.

Why Residency Matters

An individual’s tax residency status directly influences several tax implications, including TDS obligations under Section 192, DTAA applicability, foreign tax credit eligibility, and the taxation of global income, including equity compensation. A wrong classification can easily lead to double taxation, inaccurate reporting, and non-compliance with Indian tax laws.

Key Employer Tax Responsibilities in Global Mobility and Expatriate Compliance

The following are some of the key tax responsibilities employers must manage when dealing with expatriate taxes:

1. Withholding Tax (TDS)

Indian employers must deduct tax at source on employee salaries, even if the salary is paid overseas, as long as the services are rendered in India. In cases where DTAAs apply, employers are expected to factor in treaty benefits. Errors in these deductions could result in retrospective tax demands and penalties.

2. Social Security Contributions

Some expatriates working in India may be required to contribute to India’s EPF (Employee Provident Fund) and ESI (Employee State Insurance) schemes. However, bilateral Social Security Agreements (SSAs) with countries like Germany and the UAE can offer exemptions, provided the employee presents a valid Certificate of Coverage (CoC). Without an SSA in place, the risk of dual contributions remains significant, making this one of the most common global mobility issues faced by MNCs.

3. Professional Tax (PT)

This is a state-level tax that must be deducted based on salary slabs as per local laws. Companies need to stay on top of state-specific requirements to ensure timely registration, deduction, and payment.

4. Payroll Structuring

A well-designed payroll package can help employees and employers reduce unnecessary tax exposure. It’s essential to structure salaries to include components like allowances and equity compensation while staying within the boundaries of the law.

5. Permanent Establishment (PE) Risk

When foreign employees are seconded to India, there’s a risk they could create a PE for their overseas employer, especially if they’re involved in core decision-making or client-facing roles. Under Article 15 of most DTAAs, the “economic employer” concept can determine whether a PE exists. If it does, the foreign company may be liable to pay corporate tax in India.

6. Double Taxation Avoidance Agreements (DTAAs)

India has signed DTAAs with over 90 countries, offering relief from double taxation through either exemption or credit methods:

• Exemption Method: Income is taxed solely in one country.
• Credit Method: Taxes paid in a foreign country can be claimed as a credit against liabilities for Indian taxes.

To take advantage of these treaties, employers must ensure they collect valid Tax Residency Certificates (TRC), fill out Form 10F correctly, and maintain comprehensive documentation. Failure to do so can disqualify the employee from DTAA relief and create downstream compliance issues.

7. Indirect Tax and Transfer Pricing Considerations

As part of the broader corporate tax framework in India, companies must pay close attention to indirect tax obligations and transfer pricing rules, both of which can have significant implications for compliance and costs.

1. GST on Secondment

Under India’s corporate tax framework, secondment agreements are a common area where indirect tax considerations intersect with employment arrangements. These agreements may be classified as manpower supply services, which are subject to an 18% GST. This classification continues to create friction and confusion among multinationals, as it directly affects the overall tax cost of seconded employees. Proper contract wording and well-structured intercompany agreements can help mitigate this exposure and align secondment arrangements with broader corporate tax compliance strategies.

2. Reverse Charge Mechanism

Certain services provided by expatriates, especially those outside employment contracts, could trigger GST under the reverse charge mechanism. Employers need to evaluate each arrangement carefully to stay compliant.

3. Transfer Pricing Compliance

When companies share resources or costs across borders, including equity compensation, those transactions must meet arm’s length standards under Indian transfer pricing rules. Inaccurate characterization or documentation can lead to tax adjustments and penalties.

Employee Tax Equalization and Protection Policies

These policies, although employee-friendly, significantly impact the reporting and settlement of expatriates’ taxes. They also affect payroll administration and year-end reconciliations, making proper planning essential.

To attract top global talent, companies often implement tax equalization or tax protection strategies:

• Tax Equalization: The employer covers any additional tax liability arising from relocation, making sure the employee’s financial situation remains as favourable as in their home country.
• Tax Protection: The employee pays taxes in their home country as usual, but any excess taxes paid abroad are reimbursed by the employer.

Essential Regulatory Shifts Employers Must Prepare For

Several recent changes in India’s tax landscape are worth noting:

• Secondment arrangements are under tighter scrutiny for GST purposes, following key judicial rulings.
• DTAA enforcement is becoming more rigorous, with mandatory TRCs and stricter verification of Form 10F.
• Digital tax processes now include faceless assessments and increased e-verification, raising the bar for documentation.
• India is aligning domestic tax rules with the OECD’s Pillar Two framework on global minimum taxation, which may reshape how companies handle equity compensation and international mobility.

Conclusion

Managing expatriate taxes in today’s interconnected world is not just a compliance task but a vital component of global workforce strategy. Indian employers must adopt a holistic approach to global mobility tax issues, covering everything from tax residency and PE risk to equity compensation and indirect taxes.

By aligning tax strategy with HR policies, maintaining clear documentation, and working closely with international tax experts, companies can avoid costly missteps, enhance employee satisfaction, and stay ahead in an increasingly regulated global tax environment.