Return Filing Timelines And Their Impact On Taxation For Overseas Salaried Employees

As most of us are aware, April to March is the tax year in India. Salaried taxpayers need to file their original return of income within 31 July following the said tax year, though they do have a further five-month window to comply with the statutory requirement or amend the original return.

In other words, they can file their personal tax return (belated original return or amended one) within nine months from the end of the relevant tax year. This sounds like a reasonable timeline within which salaried taxpayers can ensure compliance. But this may not be the case when one has been assigned to work overseas (also referred to as mobile employees).

One may wonder what the additional requirements are that necessitates more time to meet the tax compliances. Let us have a quick look on the legislative background.

Double tax avoidance agreements (DTAA) have the objective to make sure that you don’t pay tax twice on the same income .

Relief on double taxation is provided in two ways, either by exemption of incomes earned abroad from the resident country, or by providing credit in resident country for the taxes already paid abroad. In some cases, DTAA also provides for concessional tax rates for a particular source of income. Indian tax laws also provide the mechanisms for claiming such relief.

In order to claim credits for taxes paid overseas (Foreign Tax Credit–FTC), the taxpayer will have to file a statement in Form 67 along with proof substantiating/evidencing overseas tax payment. Similarly, a non-resident would need a Tax Residency Certificate (TRC) substantiating that he/she is a resident of the overseas jurisdiction in order to be eligible for claiming exemption under the DTAA.

Having discussed the background, where could the challenge lie?

Primarily, it is on account of the difference in tax years between India and other countries. Many foreign tax jurisdictions follow the calendar year as their tax year, and some countries follow any other 12-month period as the tax year. To complicate this further, there are varying tax return timelines that may hinder Indian tax return filing documentation, some of these are tabulated below:

As can be seen from the above table, the timing differences impacting the procedural requirements come as a roadblock for overseas salaried taxpayers. Though Form 67 is not a new procedural requirement, the challenge intensifies when the Indian tax return timelines are shortened.

Up until AY 2016-17, the due date for filing a revised/belated tax return was up to two years from the end of the relevant financial year. This was then reduced to one year from AY 2017-18.

However, effective AY 2021-22 onwards, the timeline was further reduced to nine months, though the government had extended such timeline by a further three months on account of the pandemic.

The Budget 2021 memorandum had mentioned that with the massive technological upgrade in the income tax department, the time taken to conduct and complete the processes has greatly reduced.

Unfortunately, the reduced timelines do not consider the difficulty of mobile employees who have to secure information/evidence relating to overseas income, taxes paid on such income, and tax residency status, as most of the tax filing due dates are beyond the December 31 timeline.

To illustrate, let’s suppose an individual has travelled to the US on January 1, 2023 and is taxable in India for the income earned in the US during the period Jan 1, 2023 to March 31, 2023 (covering the India tax year 2022-23).

The individual, is therefore, required to file the correct and complete tax return (India) before December 31, 2023, factoring income earned in the US as well.

However, since the US follows the calendar year as its tax year and permits individuals to file their tax return till October 15, 2024, it is not possible for the individual to obtain the US tax return/payment proofs for the income period January 2023 to March 2023 before the Indian tax filing deadline of December 31, 2023 (that falls even before the completion of the US tax year).

In the present context, this would mean that an individual would either have to forego the claim of FTC, or proceed with claiming the same based on the monthly overseas income, withholding information which may not be completely in line with the Indian tax requirements.

Ask from mobile employees

Given that the procedural requirement should not defy the legislative intent, mobile employees are looking to the upcoming Budget for a solution in the form of an extended timeline or an eased-up process. There were recommendations in the past for a change in the Indian financial year to a calendar year, to bring it in line with around 150 other countries globally. Though it could have multi-faceted impact, such alignment could also be an alternative to address this anomaly.

Radhika Viswanathan is executive director, Vinit Turakhia is senior manager and Rajesh Ramachandran, deputy manager with Deloitte Haskins & Sells LLP.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)