Budget 2022: Tax on salary earned abroad - govt should rationalise interest levy under Section 234C

Advance tax payable in four installments applies to all categories of taxpayers, whose total tax liability during a financial year is Rs 10,000 or more after considering the benefit of tax deducted at source. It is pertinent to note that senior citizens not earning business/professional income are exempt from paying advance tax. 
 
Interest under section 234C is levied at the rate of 1% per month and is applicable for shortfall or non-payment of advance tax. Salaried individuals are subject to tax on their global income when they qualify as Resident and Ordinarily Resident (ROR) in India during a financial year.

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Event resulting in levy of interest u/s 234C on account of foreign salary

• Taxation of foreign salary: While calculating advance tax liability, the annual taxable income, including foreign salary is considered. However, the individual may have earned this salary only in the last quarter of the financial year, and hence was not in a position to estimate the advance tax liability on such salary in the first three quarters of the financial year. In the absence of a carve-out, interest is automatically levied under section 234C for non-payment/short payment of advance tax. 
• Claim of foreign tax credit (FTC): In cases of an overseas assignment, an individual is subject to tax in both (host and home) countries. However, no mechanism is notified to claim the credit of taxes paid in a foreign country at the withholding stage. Employers refrain from reporting the foreign salary and tax credit in Form 16 which results in a tax payable situation along with levy of interest under section 234C. 
• Difference in tax accounting periods: In India, the Fiscal year (1 April to 31 March) is followed whereas most countries follow the calendar year. Due to the difference in accounting periods, there can be situations wherein the FTC claimed in India is basis the payslips or on estimations which can vary basis the final amounts calculated in host country tax returns. Accordingly, the taxpayer would be under an exposure for interest under section 234C in case FTC is reduced basis the final amounts.  

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 Expectations from Budget 2022

• Taxes cannot be paid by the way of advance tax on foreign salary since they cannot be projected or even envisioned earlier. Therefore, it is recommended that the charging of interest should be aligned with the time of receipt/accrual of income as in the case of dividend and capital gains. The government could consider introducing a separate schedule for disclosing the receipt of income based on the respective month/quarter in which the income is earned.
• Notifying the procedure for claiming the credit of foreign tax paid at the withholding stage. 
• Reconsider the timelines for revision of tax returns in India to facilitate taxpayers to revise their India tax returns after filing the overseas returns or provide an option to change the FTC claims during assessment proceedings on receipt of actual documents from foreign jurisdictions.  

The above amendments would lead to better transparency in the income disclosures by the individuals. Simplifying the provisions related to the levy of interest under section 234C will be one more move that will be welcomed by the taxpayers.

(Authored by Akhil Chandna, Partner and Sarthak Prashar, Manager at Grant Thornton Bharat LLP.)