Global vs. India Tax and Remuneration Policies

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Table of Contents

Global Compensation Challenges in Emerging Market
General Characteristics of India as an Emerging Market
Influence of Tax Policy in Selecting and Recruiting International Assignees
Influence of Tax and Remuneration Policies on Global Compensation
Summary
References

Global Compensation Challenges in Emerging Market

As multinational corporation expands to new markets, all the aspects become increasingly complex for them to compete globally. They face many challenges in their bid to compensate for their diverse workforce. The challenge can also be attributed to the human resource management practices, which are also scrambling to fit in the global trend of using both the local and global nationals in a firm, which has become a critical factor for a company’s global success. MNCs operating in emerging markets find it difficult to determine a standard rate to compensate different employees.

MNCs expand their operations across borders to emerging markets to foster global economic growth through activities such as talent mobility, which has greatly influenced their general success. Human resource management is struggling to find the best fit for the company in terms of talent. The challenge arises because most organizations have not yet implemented practices that can create a strong alignment between employee mobility and the company’s goals in managing talent. Setting the right salary for the right market, which targets compensating local talents and other international talents, has become a daunting task and a major concern to multinational corporations. These firms find it difficult to develop a compensation strategy that they can use to ensure that employees of different ranks are compensated to a given limit due to the trends in the new market (Toolkits. SHRM, 2022). Some MNCs use a standard compensation rate, while others depend on the market forces of the host country to determine the compensation of the employees. Different countries across the globe have different policies and regulations apart from the market and industry factors making the payment of the workforce vary.

General Characteristics of India as an Emerging Market

India is characterized by less mature financial and regulatory policies than a more advanced economy. The country also has a low per capita income but enjoys enormous growth due to its huge population, which acts as a source of labor for MNCs. India’s growth is huge in the manufacturing sector and other sectors. This growth is also attributed to policy reforms, infrastructural development, and political stability. These factors make the country most preferred by investors compared to other emerging economies.

According to the International Monetary Fund Economic Outlook, India is among the top countries which experience exponential growth, thus, placing fourth globally. In 2017 the organization projected India would experience 7.2 percent and 7.7 percent in 2018. In 2017 the country experienced 3.3 dollars in the form of investment, which explains how stable the Indian economy is among the emerging markets (Financier Worldwide, 2017). Despite the growth and stability of the Indian market, it experiences challenges when it comes to compensating the employees of the MNCs due to tax policies and other regulatory challenges.

Influence of Tax Policy in Selecting and Recruiting International Assignees

Multinational companies that operate in India range from various sectors of the economy. They dominate the consulting and construction industries, among other segments of the Indian economy. These economy segments require highly qualified professionals, including experts and executive managers, to which the MNCs assign international duties to manage and implement temporary projects. The organization considers the employees’ productivity regarding the importance of the projects in deciding to assign them responsibility.

However, a country-specific factor can also affect the selection of the employees to be assigned international duties. The factors influencing the selection and recruitment process of employees to be assigned the international assignment may include the risk-incentive-trade-offs and tax and remuneration policies within a country. Taxation policies and regulations within a country can influence the decision of a company to assign duties to expatriates. If an organization aims to send employees abroad, it must consider international tax laws. They also have to consider wage taxation at the agent level and corporate taxation at the principal level. For the MNCs to succeed in assigning an individual an international assignment, the countries where the assignee is sent to the organization must ensure that they keep the national tax policies in mind to avoid double taxation and offer fair compensation to their employees abroad.

Influence of Tax and Remuneration Policies on Global Compensation

Influence of Tax Policies on Compensation of Expatriates

India is one of the countries which top the global emerging markets as it is in the transition phase towards the developed market. The Indian economy is growing at an unprecedented rate, even though the economy is associated with low per capita income (Dhasmana, 2017). This high growth rate makes India a lucrative market for most MNCs worldwide. Compensation is an important aspect of any organization; it provides the organization and the employee with the point where their priorities can meet. It ensures that individual goals meet and encourage the contentment of both parties. Compensation is vital for any organization as it helps the company acquire and retain talent and acts as a source for encouraging talents to ensure continuous performance.

Policy differences always dictate the compensation of various employees within a country. Global taxation on the income of the international assignee always influences the compensation of the expatriates. Apart from the requirement by most host countries that require expatriates to pay taxes on their global income, there may be a range of additional taxes on their global income levied by the host country (Mansaray, 2022). These additional taxes may include the tax on shipments made by expatriates and excise duty on imported goods that often have the potential to be high. Taxation and retirement welfare policies vary across countries, forming part of national policy. National policies determine the relationship between employees, employers, and the government, influencing the compensation and reward system globally.

India’s existing Exchange Control Regulation policy allows expatriates to receive up to 75 percent of their salaries from outside the country. This is only possible when the expatriate receives their payment from a foreign company; however, the remaining 25 percent of the salary is then paid to the individual in India (Directorate of Income Tax, 2018). The income tax of the amount earned by the expatriate is discharged in India. This regulation also influences the compensation in many ways as it requires foreign employees who are not permanent residents of India but resides within the country. In an event that these expatriates receive their salaries while outside India, the law requires that they first bring their salaries into the country. After that, it will be the sole responsibility of the expatriate to find a solution by meeting expenses, and they need to transfer their salary abroad.

The Indian Foreign Exchange Management Act of 1999 is considered less draconian, but it still has some challenges that make it difficult for expatriates’ compensation. It is less draconian because it allows the expatriates within the country to receive and transfer their net earnings to support their families abroad. However, it becomes challenging for the employees who live with their families in India to do the same but still want to meet their responsibilities abroad. This influences the compensation system as these expatriates have a limited option as their net earnings can only be transferred abroad if they permanently relocate to their home country. The Act gives the employees obligations in India to pay their individual income tax.

The salaries earned by expatriates for any work done in India are subject to income, irrespective of where the employee receives their salaries. The Indian national policy also helps the government obtain income tax from foreign national global income after a given duration stay where the expatriate is considered a resident of India. This policy varies between India and other countries to avoid double taxation issues. The MNCs often cover much of these additional taxes burden. This element of expatriate compensation is commonly known as tax equalization. The company may offer to pay these extra taxes to relieve the expatriate of extra charges.

Influence of Remuneration Policies on Expatriates

Apart from taxation, the MNCs are faced with the challenge of formulating compensation strategies that meet a country’s regulations that they can use to compensate their expatriates. The strategy formulated by the MNCs must be in line with the host country’s remuneration policies. The organization needs to understand the remuneration policies for employees in India and how they are applied. According to the Indian remuneration policies, workers, including expatriates, are eligible for various benefits such as provident funds, tips, compensation due to injury, and statutory bonuses. The Indian company act defines remuneration as any form of payment in terms of money or its equivalent given or passed to an individual for their work (ClearTax, 2021). For the MNCs registered as public companies, the Company Act prescribes how they can pay remuneration to employees in managerial positions.

The Act requires that the amount of money payable to managers in any financial year shall not exceed 11 percent of the company’s net profit. In addition to that, the remuneration payable to the managers and the directors of MNCs listed as the public company shall not exceed 5 percent of the company’s net profit, and in a place where the company pays renumeration to more than one person, such payment shall not exceed 10 percent of the company net profit (ClearTax, 2021). The MNCs are also obligated to comply with the need to ensure employees’ safety by providing a safer workplace and preventing sexual harassment, among other vices. The MNCs intending to send their employees to India can overcome this challenge by replicating their global employment agreements and employment policies to ensure uniformity with the Indian regulation and standards that apply to their expatriates to ensure they compensate their employees accordingly without violating the law. The MNCs can also revise their policies to align with the applicable laws and reflect India’s industry practice.

Summary

India is considered an emerging market because it has less mature financial and regulatory policies. The country has a low per capita income but enjoys enormous economic growth due to its huge population, which acts as a source of cheap labor for MNCs, prompting most companies to invest in the country. India’s growth is huge in manufacturing, construction, medical and other sectors. Foreign companies expand their operations in India and other countries to promote their global economic growth. India is one of the countries which top the global emerging markets as it is in the transition phase towards the developed market. Tax and remuneration policies play a critical role in the company’s global compensation system and selection of international assignees. Tax policies can influence how people will view the compensation system. Multinational companies which intend to send their employees to India are challenged by India’s tax policies and remuneration regulations on determining compensation.

The Indian income tax influences compensation in many ways. It requires foreign employees who are not permanent residents of India but reside within the country first to bring their salaries into the country and find out how to remit the remaining to their own country. Apart from taxation, multinational companies are faced with the challenges of developing remuneration strategies that meet India’s regulations. The organization needs to understand the remuneration policies within the country to reward its employees in India and how they are applied. This is very important as it helps the company motivate its employees without breaking the laws within the country.

References

ClearTax. (2021). Managerial remuneration under the Companies Act, 2013. Under the Companies Act, 2013.

Dhasmana, I. (2017).IMF retains India’s growth projections at 7.2%, UPS China’s. Business Standard.

Directorate of Income Tax. (2018). Tax treatment of foreign income of persons resident in India.

India – a front runner among emerging markets. Financier Worldwide. (2017).

Jha, L. K. (2018). IMF sees India GDP growth at 7.4% in 2018, China’s at 6.8%. mint.

Mansaray, H.E. (2022). The impact of multinationals on labor relations in developing countries: A literature review. Konfrontasi: Jurnal Kultural, Ekonomi Dan Perubahan Sosial, 9(1), 70–80.

Toolkits. SHRM. (2022).

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