How does double taxation avoidance treaty effects expatriates

Where expatriate employees are resident of a country with which India has entered into an Agreement for Avoidance of Double Taxation ['DTAA’}, their tax liabilities will be primarily decided as per the provisions of the concerned DTAA. As a general proposition of law, the provisions of DTAA override the provisions of the Indian tax law. But where the DTAA is silent, the Indian tax law will come into operation. Furthermore, if the provisions of Indian law are more favorable to a taxpayer than the provisions contained in the DTAA, the taxpayer will be entitled to take the benefit of the Indian tax provisions. It may be noticed here that India has signed DTAAs with a very large number of countries, which virtually includes all major developed and developing countries in the world.

Whereas the provisions of the various DTAAs may vary from country to country, generally, the DTAAs provide that the resident of a foreign country will be liable to pay tax on his income by way of salary etc. in the country of his residence. As a general proposition in DTAAs, Indian income tax will not be payable by an expatriate employee under the following circumstances:

(a) If he is present in India for a period not exceeding 183 days in the relevant year; and
(b) The remuneration is paid to him by an employer who is not a resident of India; and
(c) The remuneration is not borne by a permanent establishment or a fixed base of the employer in India; or the remuneration is not deductible in computing the profits of the foreign enterprise chargeable to tax in India.

Where an expatriate employee is subjected to tax on his remuneration etc. in India as well as in the country of his residence, the tax paid in India would be allowed as a credit against the tax payable by him on the same income in the country of his residence.

DTAAs usually have separate provisions relating to Director’s Fee, Government employees, Students and Trainees, Teachers and Artists and Athletes whose tax obligations are to be determined as per the concerned DTAA.