Income Tax Violations: Will Taxing The Expats Prove Too Taxing?

INCOME-TAX VIOLATIONS
Will Taxing The Expats Prove Too Taxing?

India Inc. may have to, eventually, pay the price for the government's crackdown on tax-evading expatriates.

By Alam Srinivas

Ravi Kant, Chairman Central Board of Direct Tax It's a Rs 484-crore controversy that has now acquired a swadeshi tinge. In August, 1998, when the Delhi Circle of the Income-Tax Department initiated its first step towards uncovering the income-tax-evasion scandal involving expatriates, reactions were muted. But, within months, the expatriates were convinced that the Bharatiya Janata Party was targeting foreigners--especially Japanese--working in India. Their suspicions were confirmed on February 27, 1999. For, Budget 99 plugged more loopholes in the income-tax laws concerning salaries of foreigners, and the computation of the written-down value of assets brought by them for official use into India. Finally, on March 12, 1999, the income-tax authorities conducted surveys to investigate tax-evasion by expatriate employees of Maruti Udyog.

Indeed, Japanese managers think that the Government Of India (GOI), probably, reacted to their government's strong anti-nuclear stance after both India and Pakistan conducted a series of nuclear tests in May, 1998. Immediately after Pokhran-II, Japan stopped all bilateral aid to India, and even lobbied against India at multilateral fora. Admits a Delhi-based senior executive working for a Japanese construction company: "We feel that the income-tax officials are deliberately harassing us." Denies Raj Narain, 45, Chief Commissioner (Income-Tax): "There were no attempts to target the Japanese or other expatriates. The investigations were guided by information received by us."

Things have reached a stage where senior Japanese managers openly state that the issue may force Japanese companies to close down their liaison offices in India, and even review prospective inflows of Foreign Direct Investment (FDI). That's bad news since the Japanese are averse to risks, and India--according to the FDI Confidence Index prepared by A.T. Kearney--ranks a lowly 16th on Japan's list of most-preferred investment destinations. In comparison, India is ranked 8th by the US investors and 5th by the business community in the UK.

Japan's increasing aversion to investing in India will not deter the Income-Tax Department since its actions are legally justifiable, and other large investor-countries, like the US and Germany, have not sounded the alarm-bells. In fact, almost all the targeted companies have admitted to tax violations. More important, the existing Indian laws for taxing expatriates are no different from those applicable in developed nations like Japan and the US.

According to the reply to a Parliament question (dated March 5, 1999), 82 companies--including 57 Japanese--were slapped with income-tax notices amounting to Rs 484 crore. Of this amount, Rs 472 crore has already been paid by the expatriates. However, these figures only relate to the cases in Delhi, and the Income-Tax Department is expecting more revenues by taxing expatriates working for transnationals' offices in Mumbai and Chennai. But even the current offenders' list is a veritable Who's Who of Japanese and Korean companies: Bank Of Tokyo, Japan Airlines, Daewoo Motors India, National Panasonic, LG Electronics, Samsung Electronics, and Honda Motor Co.. There are a few European names--Lufthansa, Ericsson, Nokia, and Alcatel--too.

The major charge: expatriates have not been disclosing their full salaries earned in India. Under Section 9 of the Income-Tax Act, 1961, foreigners have to pay income-tax in India on salaries earned for services rendered in the country. In addition, if an expatriate works in India for more than 181 days, the annual global salary is taxed in India. However, the government now says that many transnationals paid a substantial portion of the salaries in their respective countries which was, obviously, not disclosed for income-tax purposes. Numerous perks doled out to the expatriate managers--including the money paid to cover their rentals and expenses on children's education--were also not included in the returns filed by them.

Worse, the department found that some companies had evaded taxes for nearly a decade. Says a senior official at the Income-Tax Office in Delhi: "The Rs 484 crore includes arrears for the past 10 years in the case of some companies." While agreeing that foreigners should legitimately pay their taxes, a senior official of the Delhi-based Japanese Chamber of Commerce & Industry (JCCI) adds: "We were advised by our Indian tax consultants and auditors not to disclose our entire salary. And we accepted it without realising that we were committing a wrong." That explains why, in September, 1998, the JCCI advised all its 94 members to voluntarily review their past tax records to amicably resolve the dispute with the tax officials.

By January this year, almost all JCCI members in Delhi had cleared up their tax arrears. Including the potential revenues from other metros, the GOI estimates that it will earn additional taxes of nearly Rs 150 crore per year from expatriates. But that's not all. More gains are expected on a recurring basis from changes announced in Budget 99. For one, Section 9 has been modified to tax salaries earned by expatriates during their "leave or rest" period for "services rendered in India." Which will bring a part of the income earned by foreigners working on offshore platforms into the tax net.

Offshore drilling requires continuous work for months. After that, the engineers and technicians--whether foreigners or natives--are granted leave for a few months. In fact, generally, the companies finance their workers' holiday trips during the leave period. Until now, expatriates did not consider salaries for this period while computing their taxes in India. But the department contested these claims, and the matter was dragged to the courts. Unfortunately, the GOI lost several cases at the Income-Tax Tribunal stage.

However, the Budget amendment ends all ambiguities. Now, if the rest period is both preceded and succeeded by a tenure with the same company in India, the income for the period will be taxed. Says a Joint Secretary in the Finance Ministry, who was involved in pre-Budget 99 discussions on the proposed amendment: "This removes the scope for legal disputes, and will help us earn an additional revenue of Rs 75 crore per year." In fact, he hints that several companies knew that they were exploiting a loophole in the law. That's why many of them agreed to pay the disputed taxes under the 1997 Voluntary Disclosure of Income Scheme.

Similar clarification was required to compute the written-down value of assets brought into the country by non-residents for official use. In this case, the GOI maintains that it has only decided to use the same methodology to calculate the depreciated asset value for both residents and non-residents. So, instead of allowing expatriates to unilaterally declare the value of such assets, it will be calculated by depreciating the original value as per the existing rates. "But the revenue hike due to the change will be marginal," says a Delhi-based income tax official.

However, the spate of clarifications and the tacit acceptance of tax-evasion is unlikely to clear the legal cobwebs. To begin with, the JCCI is sure that certain clauses in the double-taxation agreement between India and Japan need to be amended in the light of the recent developments. Explains a senior JCCI official: "According to Japanese laws, we need to maintain records for only the last 7 years. But, in India, we have been told to keep information for varying periods: 10 years, 15 years, and since the company's incorporation."

Legalese apart, the main setback to the expatriate community has been at an emotional level. Which may have its economic consequences in the near future. But Narain maintains that such apprehensions will not last long, and adds: "We plan to target resident Indians who are evading taxes too." But that is not going to reduce the growing feeling that a swadeshi government is deliberately targeting the videshis!

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