Contractor’s guide to contracting in India
Let’s now turn on our overseas contracting voyage from Italy, and make for one of the largest and fastest growing economies in the world -- India, and ascertain why so many contractors will likely disembark, writes Nikolas Papageorgiou of Access Financial.
Perhaps it is not a country that will immediately come to many UK-based contractors’ minds when thinking about contracting overseas, but once various factors – including compensation, taxation and cost of living – are taken into account, India (particularly Mumbai) is the most lucrative destination for foreign contractors.
Famed as one of the 'BRICs' (identified alongside Brazil, Russia and China as one of the emerging powerhouses of the global economy), India’s economy is set to maintain its impressive rate of growth and retain its mantle as the world’s fastest growing major economy. It is expected to grow by 7.3 per cent for fiscal year 2018/19, up from 6.7 per cent the previous year.
What are the benefits of working in India as a contractor?
- English widely spoken
- Pleasant climate
- Cheap living costs versus other Asian countries
- Rich history and culture
What about worker take-home pay in India?
The net retention of an employed person is approximately 60%.
What are the levels of taxation in India?
Personal taxable income depends upon one’s residential status in India. According to tax laws in India, an individual is resident in India if he/she spends at least:
- 182 days in India; or
- 60 days in India in a relevant year and at least 365 days in India in the preceding four years.
A resident individual is not ‘ordinary resident’ if he/she has been a non-resident in nine out of 10 preceding years or has been in India for less than 729 days during the preceding seven years.
Tax rates for the financial year April 1st 2018 to March 31st 2019
For Resident Individuals (both men and women, under 60-years-old)
| Taxable Income (INR) | Tax Rate (%) |
|---|---|
| up to 250,000 (£2,733) | 0 |
| 250,000 – 500,000 (£2,733 to £5,465) | 5 |
| 500,000 – 1,000,000 (£5,465 to £10,930) | 20 |
| over 1,000,000 (over £10,930) | 30 |
For the financial year 2018-19, a tax credit/relief of 100% of income tax or INR 2,500 (£27), whichever is less, is accorded to individual taxpayers with a taxable income of up to INR 350,000 (£3,825).
There is a surcharge (payable on income tax) of 10% on persons (other than companies) whose taxable income is between INR 5 million (£54,650) to INR 10 million (£109,300) and a 15% surcharge on income tax where the total income exceeds INR 10 million, with marginal relief.
Education cess: This is an additional levy on basic tax liability to cover the costs of secondary and higher education. This was recently increased to 4%.
Withholding taxes (TDS: Tax Deducted at Source)
- Employers are required to withhold income tax from an employee’s salary based on the progressive tax rates mentioned above.
- Tax is based on the estimated income for the relevant tax year and deposited with the government treasury within seven days from the end of the month for which the salary is paid.
- Withholding taxes needs to be deducted even if the employer is not resident in India.
Advance taxes
An expatriate is required to pay "Advance Tax" on the income on which tax is not withheld by the employer. A foreign national with an income from a source other than salary is taxable in India and thus is required to pay advance tax on that income in three instalments.
If there is an overall shortfall in payment of tax, it should be made good before filing the annual tax return for the relevant year. If a refund is due, it should be claimed in the annual income tax return.
What are India’s social security requirements?
India has two types of Social Security schemes:
- Employee Provident Fund
- Employee Pension Scheme
It is mandatory for all international workers to contribute to the Provident Fund irrespective of their total salary.
And ‘international workers’ include also Indian employees working in a foreign country with which India has a Social Security Agreement (SSA), or foreign nationals (holding a passport other than Indian) working in India.
Contributions
Social security contributions (EPF) are mandatory for all employees and are tax deductible, including International Workers (IWs), employed by an Indian entity.
There is no cap on the salary on which contributions are payable by the employer as well as the employee. Employees earning up to INR 15,000 (£164) per month are required to contribute 12% of their gross salary to the Employees Provident Fund (EPF) and employers are required to contribute 12% of gross salaries to the EPF.
| Scheme | Provident Fund | Pension Fund |
| Employer Contribution |
Salary up to INR 15,000 -3.67% of 15,000 (£164) (Basic salary + Dearness Allowance + Retaining Allowance + Cash value of any food concession) Salary exceeding INR 15,000 -12% of the amount exceeding 15,000 |
Salary up to INR 15,000 -8.33% of 15,000 Salary exceeding INR 15,000 - no contribution |
| Employee contribution | 12% of salary | No contribution |
Exceptions
International workers coming from a country with which India has entered into a SSA are excluded from contributing towards the Provident Fund in India, if they have been contributing to the social security system of their country of origin.
India has signed a Social Security Agreements (SSAs) with the following countries: Belgium, Germany, Switzerland, Denmark, Luxembourg, France, South Korea, Netherlands, Hungary, Sweden, Finland, Czech Republic, Norway, Austria, Canada (excl. Quebec), Australia and Japan.
Impact: International workers on an assignment up to specified periods (e.g. from Belgium and France, up to 60 months), are exempt from making social security contributions in India provided they continue to make social security contributions in their home countries.
What about Health Insurance in India?
Free medical and hospital facilities are provided through the government-approved Municipal Clinics and Hospitals for all individuals.
The standard of state-provided healthcare is below that of Western countries, so it is advisable to have comprehensive medical insurance cover. Many private hospitals in India provide a high quality of care.
How do I enter India legally?
In many knowledge-dependent sectors of the economy, such as IT, there is a growing demand for high-level managers and professionals. Immigration of unskilled labour is generally not permitted.
Employment Visa: Foreign nationals who are coming to India to take up employment should apply for an Employment Visa, which is issued by the Indian Embassy/Consulate in the country of their residence.
Special remittance provision to foreign nationals: As per the rules given by the RBI (Reserve Bank of India), a citizen of a foreign state, resident in India employed with a company incorporated in India may open, hold and maintain a foreign currency account with a bank outside India and remit the whole salary received in India in Indian rupees, to such an account, for the services rendered to the Indian company, provided that income-tax chargeable under the Income-tax Act, 1961, is paid on the entire salary accrued in India.
Transfer of funds abroad: Employment income credited to the bank account in India is freely repatriable abroad.
What tax deductions are on offer in India?
From the fiscal year 2019, taxpayers will benefit from the standard deduction of INR 40,000 (£437).
Every income taxpayer can save tax on income up to a maximum of INR 1,500,000 (£16,395) per year by investing in approved funds and Investment schemes (under Section 80C of the Income Tax Act).
Can I use my existing UK limited company in India?
You can use your limited company in India but organisations are generally reluctant to engage foreign contractors operating via limited companies registered offshore. The reason for this is that in the event of any non-compliance, it is not only the foreign national who will be subject to the appropriate consequences, but the consequences will extend to the Indian entity that's sponsoring and inviting the foreign national to conduct business with them as well.
The consequences include blacklisting the company or entity, which may impact the inflow of future foreign employees and business travellers from the same entity. As a result, there is a widespread reluctance in India to engage personal service companies domiciled overseas.
Final thoughts
Our recent research revealed that the Indian financial centre of Mumbai is the most attractive destination for contractors. It should be noted that India’s social security system and its tax rates are not particularly favourable. Yet it is the low cost of living that more than compensates.
Foreign workers in India are often sent to the country by the companies they work on behalf of, and they usually offer highly competitive rates. This means that contractors can enjoy an equivalent standard of living to their home country at a fraction of the cost. Many contractors are also drawn to the exoticism and diversity of Indian culture and the fact that business is invariably conducted in English. As the economy continues to expand, fuelling demand for skills, India will be an increasingly popular destination for foreign workers, especially Britons.
