Working from home? Its tax implications may take you by surprise

Rajeshree Sabnavis, Mansi Parekh

The year 2020 will go down in history as the year of uncertainty and volatility as the covid-19 pandemic outbreak led to business shutdowns and cessation of economic activity on a global scale. The socio-economic impact of the pandemic on people across the economic and social spectrum was unprecedented in terms of increasing livelihood crises and a drop in earnings. Moreover, on account of the worldwide lockdown and global travel restrictions, people were stuck in different countries and could not fly back home giving the concept of work from home a new dimension. As populations around the world focused increasingly on taking care of their health and ensuring the well-being of their families, ascertaining the impact of tax on incomes has taken a backseat.

There have been several instances where the Covid-19 induced lockdown led to additional tax compliances on individuals working from remote locations in foreign countries. Employees based in India and working for overseas employers qualify as Resident and Ordinarily Resident (ROR) of India. Their global income is subjected to tax in India. However, the residency provisions for FY 2019-20 were relaxed by the Indian Government, restricting the cut-off date for considering one’s physical presence to 22 March 2020 instead of 31 March 2020, thereby excluding the COVID-19 lockdown phase.

It also becomes pertinent to evaluate international tax implications on the permanent establishment exposure of foreign entities on account of the presence of their employees working from home in India. This may have additional tax implications on the overseas employer. Due to travel restrictions during the lockdown, several C-suite level executives of overseas companies of the ranks of CEO, CFO, Directors, Chairman, etc. could not travel to attend company board meetings physically and were compelled to register their presence at meetings online through virtual conferencing platforms. This could trigger a potential change in the ‘place of effective management’ (POEM) of the overseas entities, thereby exposing it to the risk of being identified as a resident of India.

The compensation structure of Indian employees working from home needs to be assessed in terms of whether it has led to an extra tax burden on them. The current salary structure of employees includes various allowances, out of which, certain allowances like conveyance allowance, Leave Travel Allowance (LTA), House Rent Allowance (HRA), etc. are exempt basis actual incurrence of expenses. LTA is granted to meet the expenses incurred for travelling while on leave. Because of work from home and travel restrictions, there was no expenditure incurred on account of conveyance or leave travel and hence such allowances would now form part of taxable income. Further, due to the shock wave created by COVID-19, several migrant employees vacated their rental premises and moved to their places. As there was no actual expenditure towards rent, the HRA also become taxable.

To make sure that appropriate tax liability on salary expense is discharged, the employee’s compensation is structured at the beginning of the year itself. Given the above uncertainties, many allowances forming part of salary structure, which were enjoying the tag of ‘Exempt’, will now (although for a short duration, till things return to normalcy) be a taxable part of their salary, thereby increasing the tax burden on the employees. Thus, it would be worthwhile for the employers to revisit the salary structures of their employees and include reimbursement of broadband internet subscriptions, food coupons, books, and periodicals, etc.

As taxpayers eagerly await more tax relief measures from the government, they need to be aware of the tax implications arising from the work from home regime while doing their tax planning.

Rajeshree Sabnavis is Founder, and Mansi Parekh is Assistant Manager at Rajeshree Sabnavis & Associates, a boutique tax consultancy firm. Views expressed are the authors’ personal.