In the last few months, the Indian government/regulators have taken steps to facilitate free mobility of executives, from an exchange control or social security or immigration visa perspective. This article seeks to provide an overview of some of the recent changes in these areas.
By a notification dated 30 September, the Reserve Bank of India (RBI) relaxed the exchange control rules relating to receipt of salary overseas by foreign nationals or Indian citizens employed with foreign companies and deputed to the office or branch or subsidiary or joint venture in India. Hitherto, such deputed expatriates were allowed to receive 75% of their salary abroad (subject to Indian tax payment). The remaining salary was required to be paid in rupees in India.
Now, such deputed employees are allowed to receive their entire salary abroad, subject to payment of Indian taxes on it. Thus, for example, an expatriate deputed to the Indian operations by a foreign multinational will have the option to receive the entire take-home component of his salary either in India or in his home country. This provides him further flexibility, including in terms of providing him exchange rate protection.
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Interestingly, the language of the above provisions dealing with direct receipt of salary overseas (whether 75% earlier or 100% after the liberalization) is such that it applies only to an expatriate whose primary employment contract is with a foreign company and is then deputed to the Indian office or subsidiary or venture. The same does not seem to apply to employees deputed to other group companies, which do not qualify as either a subsidiary or venture of the foreign employer company.
Also, the rules do not apply to a foreign national who takes up primary employment with an Indian company, say, a foreign national appointed as the chief executive officer of an India-based corporate group and exercising employment in India. In other cases, a deputation could have tax implications for the foreign employer company in India and in such cases, the employees take up direct employment with the Indian subsidiary/venture. In all such cases, the option to receive the salary in India or abroad is not available. Such expatriates would necessarily have to receive salary in India.
However, in most cases (for example, where employment in India is less than three years), such expatriates are allowed to later remit the net salary (take-home component) to their home country for maintenance of close relatives under the Foreign Exchange Management (Current Account Transaction) Rules. In all other cases, specific RBI approval would be required. The government should consider clarifying and widening this liberalization, so that it is applicable to a person deputed to India but comes from an associate company, and not restricted to a situation of just the parent firm.
On the other hand, for an Indian national taking up employment abroad or who is deputed overseas, the regulations allow receipt of the entire salary abroad or in India, at the choice of the individual. Besides, upon returning to India, the rules allow retention of salary earned abroad in a foreign bank account in foreign currency. Alternatively, such salary can be brought back into India and held in a resident foreign currency (RFC) account or a normal savings account with an Indian bank.
A typical issue faced in cross-border movement of executives is the applicability of social security laws in both the home country and the host country. Generally, such employees do not derive any real benefits from social security contributions in the host country and, thus, would not agree to the deductions thereof from their salaries. Often, therefore, the employer has to foot the additional bill, thereby increasing costs.
In order to mitigate dual contribution of social security both at home and overseas, countries can (and do) enter into bilateral social security agreements. The concept is akin to a double tax avoidance agreement (entered into by countries to mitigate double taxation of the same income in both the home and host countries).
In the last three months, the Indian government has entered into such agreements with a host of nations within the European Union —Germany, France, Belgium, Switzerland and the Netherlands, to name the prominent ones.
Typically, such agreements protect the interests of Indian professionals deputed on short-term contracts (typically, less than five years) to the host country by securing exemption from social security contributions in the host country and vice versa for foreign professionals deputed to India. Obviously, the employee continues to make social security contributions in his home country (while on deputation). In case of longer-term contracts, the agreements provide for the export of benefits (from social security contributed in the host country) upon relocation back to the home country. Thus, for instance, the balance lying in the employee’s provident fund account of an expatriate can be transferred to his social security account in the home country upon completion of his deputation/employment term in India.
For instance, the social security agreement between India and the Netherlands provides for benefits to Indian and Dutch expatriates working in each other’s countries. As per the agreement, those working on a short-term contract of up to five years are exempted from social security contributions in the host country provided they continue to make social security payments in their home countries.
It also envisages that those who live and work for periods longer than five years and make social security contributions under the host country laws will be entitled to the export of the social security benefits should they relocate to the home country on completion of their contract or on retirement.
In the case of executives directly employed by an employer in the host country (and not deputed by an employer from another country) or self-employed persons, the agreement provides for contributions in the host country, with subsequent export (portability) benefits as in the case of long-term deputation of employees.
The ministry of home affairs, in a release dated 25 September, has clarified various issues relating to the issue of business visa (BV) or employment visa (EV) to foreign nationals immigrating into India. Executives and professionals deputed into India would necessarily need to have an EV and cannot continue to work in India under a BV.
Besides, the rules also allow for dependent visas to be issued to family members. While the changes/clarifications have led to certain hiccups in the short term, the rules would help rationalize the visa requirements going forward.
The above steps of the government and ongoing efforts in that direction on various fronts (exchange control, social security agreements and immigration visa rules) should provide flexibility/clarity for executives deputed to or from India and, indeed, pave the way for cross-border mobility of human capital, which India is witnessing. This should spur economic growth in terms of the ability to further facilitate expatriate talent coming into India.
Ketan Dalal is executive director and Vishal Shah is associate director, PricewaterhouseCoopers. Your comments, feedback are welcome at email@example.com.