As Covid-related travel restrictions are lifted, many multinationals, as part of a documented policy, tell foreign employees vacationing in India to avoid taking office laptops or doing any kind of work while they are in the country. The fear is that if employees answer an email or attend a video conference, it could result 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 when visiting India should not carry office laptops or must not perform work like scams or respond to official emails,” said Sujjain Talwar, co-founder and partner of ELP. “The fear is that it could result in even worldwide income being taxed in the country.”
Many global law firms that are not licensed in India even force their partners to sign a pledge that they will not meet any clients or potential clients while in India.
Given India’s strict tax and PE rules, attending an official call or responding to an email may result in a tax bill. The PE is essentially a regulatory litmus test that determines which country has the first right to tax a company’s income.
It’s not just law firms. Professional services and IT vendors that have offices in India are putting in place backup mechanisms. Many of them hire risk and regulatory experts to protect them from any legal issues. Out of an abundance of caution, some multinational companies are increasingly asking employees in sensitive positions to exercise caution when transporting electronic devices to India.
“The employee notices include protocols regarding in-country email access as well as cautionary information about local interactions to address potential tax and regulatory issues that may arise in the future,” said Gaganpreet Puri, Head, Risk and Regulatory, A&M India. .
Often, companies work on global projects to which the Indian branch contributes. A percentage of global revenue may be allocated to India, with national taxes levied on this. However, if the tax authorities can challenge this percentage to prove that more work has been done in the country, the tax expenditure increases. In the past, the tax department has flagged such cases to establish that decisions were made in India, making it a basis for worldwide income tax audit.
In other cases, multinationals that do not have operations in India fear that if they do official work here, it could be interpreted as critical decisions made in the country, resulting in internal taxes.