Requirement for Foreign Employees to Work
Once foreign companies set up an entity in India, they often prefer to appoint employees from their home country or headquarters for the management and control of the Indian business. This is done mainly for the convenience of co-ordination with the parent company in terms of decision-making, financial management and other business matters. This movement of employees could be undertaken by way of secondment or transfer. There are three broad considerations that must be kept in mind, in either of the approaches: (i) income tax issues; (ii) social security contributions; and (iii) visa considerations.
Income Tax Issues
It is imperative that any secondment/transfer of employees be structured appropriately, so as to minimise any permanent establishment risks for the foreign entity in India. Also, the tax treatment of any service fee paid/reimbursement of expenses by the Indian entity to the foreign company must be analysed well in advance given that this area has often been the subject of scrutiny by tax authorities. Further, the tax position of the individual in India must also be examined – this would depend on his/her tax residential status as specified under the Income tax Act, 1961 (“ITA”). In terms of the ITA, an individual is said to be resident in India if he/she has been physically present in India for a period of 182 days or more in the relevant financial year. However, the Finance Act of 2020 has reduced the abovementioned time period to 120 days for Indian citizens and person of Indian origin with a total income, other than income from foreign sources, of more than INR 1.5 Million (~USD 20,453)
Indian tax residents are subject to tax in India on their global income, while non-residents are subject to tax only on income that is received/deemed to be received in India, or income accrues or arises/deemed to accrue or arise to them in India. There are certain other tax exemptions prescribed under the relevant Double Taxation Avoidance Agreement executed between India and the concerned host country.
Social Security Contributions
It is important to note that the EPF Act also extends to a category of employees called ‘international workers’ (“IWs”). An IW is defined both in an inbound (i.e. in the context of foreign employees coming to India) and outbound context (i.e. Indian employees going abroad). An IW (inbound) is a person who holds a passport other than an Indian passport and comes to work for an Indian establishment that is covered under the EPF Act. It is important to note that the EPF Act makes no distinction between a foreign worker on deputation to India and a foreign worker who is transferred to India. All IWs (inbound) are required to contribute to the EPF, unless they are ‘excluded employees’. Exclusion from EPF contributions is only granted if the IW contributes to a social security program in his/her host country which has executed a social security agreement (“SSA”) with India.
There are certain significant differences between EPF contributions in respect of IWs (inbound) and domestic employees. For instance, such IWs are required to contribute to the EPF on their ‘full salary’ and not merely ‘basic wages’. There are also differences in case of timing and manner of withdrawal of EPF contributions.
Business visas to India are given strictly only for ‘business purposes’, such as sales or establishing contact on behalf of the foreign company in India. Like most other jurisdictions, business visas in India cannot be used for any direct revenue generating work or employment in India. There is a separate employment visa category for employees coming to work at an Indian establishment, which is granted based on the sector and the term of the assignment. There are certain additional conditions prescribed in this regard, including that the foreign national must draw a salary in excess of USD 25,000 per annum. Foreign nationals, including their family members, who intend to stay in India for more than 180 days, must register with the Foreign Regional Registration Office (“FRRO”) within 2 weeks of arrival in India. For the purposes of registration, the individual is required to make an application in the prescribed form and be present in person at the time of registration.
Does a Foreign Employer need to Establish or Work through a Local Entity to Hire an Employee?
Foreign employers may often have requirements wherein they might need to engage a sales person, representative or agent in India, even though they may not have a place of business in India. Also, the foreign employer may not intend to immediately generate any revenue in India. In such a scenario, the foreign employer need not mandatorily set up a local entity in India. There are various methods through which the foreign employer may engage/hire representatives or an agent in India depending on the exact business requirements.
Engagement of the Representative or Agent through a Manpower Agency
This is a model where the foreign employer enters into an arrangement/agreement with a manpower agency in India, which would provide certain services to the foreign employer through identified employees of the manpower agency. However, the manpower agency would be required to satisfy the following obligations as part of the arrangement: i) processing of salaries for the identified individuals; and ii) undertaking all legal compliances for the identified individuals on account of being their employer, including under all Indian employment laws and taxation laws.
Engagement of the Representative or Sales Person as an Independent Contractor
Here, the arrangement between the representative and the foreign employer will be that of a ‘contract for services’. A contract for services implies an agreement wherein one party undertakes to provide services to or for another in the performance of which he is not subject to detailed direction and control, but exercises professional or technical skill and uses his own knowledge and discretion as appropriate. Such independent contractors would typically not be entitled to any social security benefits (as they will not be considered employees) and would have to pay their own taxes in India. However, it is important to note that in the event the foreign employer engages personnel in India by way of method 1 or 2, there is a risk of the foreign employer having a permanent establishment in India; accordingly, this arrangement would have to be structured appropriately and the tax implication with respect to the same will need to be identified.
Limitations on Background Checks
Employers are increasingly conducting background checks to guard against inaccurate resumés, overstated work experience and any employee behavioral issues. Typically, employers issue an offer letter, conduct background checks, and expressly state that the person’s employment with the organisation is contingent upon his/her clearing the background checks, and vetting of educational and job qualifications. However, the permission of the concerned employee would be required to conduct a background verification. In terms of the Information Technology Act, 2000 and Information Technology (Reasonable Security practices and procedures and sensitive personal data and information) Rules, 2011 (“IT Rules”), which is the governing legislation on data protection, any company collecting, using, or disclosing any personal information of an employee/prospective employee, will require such person’s consent. Further, the employer’s compliance requirements under the Personal Data Protection Bill, 2019, which is likely to come into effect in 2021, will need to be examined for purposes of conducting background checks on employees.
Restrictions on Application/Interview Questions
Given Constitutional safeguards against discrimination on the grounds of religion, race, caste, sex, and place of birth, it is imperative that employers bear these principles in mind while conducting background verifications and job interviews. Excessively personal questions are generally not advisable. The IT Rules apply to the collection of personal information during background verifications and during the interview process as well. In terms of the IT Rules, at the time of application, the employer must inform the concerned person of: i) the fact that his/her personal information is being collected; ii) the purpose for which the information is being collected (i.e. verification of credentials); and iii) the intended recipients of the information (i.e. the employer and/or the third-party service provider who conducts background checks).
The IT Rules further state that where any Sensitive Personal Data or Information (“SPDI“) is sought to be collected (such as passwords, financial information, bank account or payment instrument details, details of health conditions, sexual orientation, medical records and history), the same can be collected only for a lawful purpose connected with a function or activity of the company, and the collection of this information must be necessary to achieve such purpose. This purpose must be notified to the prospective employee in the application/background verification form/during an interview, and his/her consent must be obtained. It may be noted that the IT Rules permit a person to withdraw consent at any stage, in which case the company would be required to return the SPDI and not store or transfer the same any further. The IT rules prescribe certain additional safeguards for collecting, storing, processing, and transferring SPDI; for instance, the IT Rules state that any SPDI collected by a company cannot be stored/retained longer than required for the purpose of its collection, except under any applicable law.
Apart from the above, it may be noted that Indian labour and employment laws are largely silent as to the process of selection and hiring of employees in the private sector. In any case, as market practice, most employers in India conduct at least basic (education, job history) background verification of prospective employees in accordance with the IT Rules and/or ask prospective candidates to disclose specific information as a condition precedent to the employment relationship.