Tax bill worries: No work calls or mails on Indian vacation, MNCs tell executives

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A partner with a London-based Magic Circle law firm was visiting Mumbai to meet family but during his vacation he had to connect with an Indian client who’s looking to raise some money from the overseas bond market. He and the client, along with another senior partner from an Indian law firm, held the meeting in Singapore. All three then flew back to India.

As Covid-related travel curbs are lifted, many multinationals, as part of documented policy, are telling overseas employees vacationing in India to avoid taking office laptops or doing any sort of work while they are in the country. The fear is that if the employees respond to an email or attend a video conference, it could potentially end up in a large tax bill or lead to other regulatory issues.

“Some foreign law firms that do not have an office or permanent establishment (PE) in India have a policy that their partners and employees while visiting India should not carry office laptops or should not carry out work like con-calls or respond to official email,” said Sujjain Talwar, cofounder and partner at ELP. “The fear is that doing so could result in even the global revenues getting taxed in the country.”

Many global law firms that aren’t allowed in India are even making their partners sign an undertaking that they will not meet clients or potential customers while in India.

Given India’s strict rules on taxation and PE, attending an official call or replying to an email could result in a tax bill. PE is essentially a regulatory litmus test that determines which country has the first right to tax the revenue of a company.

It’s not just law firms. Professional services and IT providers that have offices in India are putting in place safeguard mechanisms. Many of them are roping in risk and regulatory experts to insulate them from any legal problems. Erring on the side of caution, some multinationals are increasingly asking employees in sensitive roles to exercise care in carrying electronic devices to India.

“Advisories to employees include protocols around accessing emails while in the country as well as cautionary information on local interactions to address potential tax and regulatory issues that may come up in the future,” said Gaganpreet Puri, leader, risk and regulatory, A&M in India.

Often, companies work on global projects that the Indian arm contributes to. A percentage of the global revenue may be allocated to India, with domestic taxes levied on that. However, if the tax department can dispute this percentage to prove that more work was done in the country, the tax outgo increases. In the past, the tax department has pointed out such instances to establish that decisions were taken in India, making that a base for tax scrutiny on global income.

In other cases, multinationals that do not have operations in India are worried that if they do any official work here, that could be construed as critical decisions being taken in the country, resulting in domestic taxes.

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