Withholding Tax in India

Withholding tax is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government.

Withholding tax in India
Chapter XVII-B of the Income Tax Act provides for deduction of tax at source on payments made by any assessee. These provisions are also applicable in case of payment made to non-residents.

Section 195 casts an obligation on the person responsible for payment to non-resident to deduct tax at source at the time of payment or at the time of credit of the sum to the account of the non-resident.

Withholding tax for NRIs and foreign companies
Withholding Tax Rates for payments made to Non-Residents are determined by the Finance Act passed by the Parliament for various years. The current rates are:

1. Interest – 20 percent of gross amount
2. Dividends – 10 percent
3. Royalties – 20 percent
4. Technical services – 20 percent
5. Any other services – individuals – 30 percent of net income
6. Companies/corporates – 40 percent of net income

The above rates are general and in respect of the countries with which India does not have a double taxation avoidance agreement.

Director of income tax (international taxation)
Statutory functions in respect of taxation of foreign companies and non-residents and withholding tax on remittances abroad are performed by the Director of Income Tax (International Taxation).

There are five DITs (International Taxation) namely located in Delhi, Mumbai, Kolkata, Chennai and Bangalore.

Permanent account numbers and filing of returns
The amendment made applicable from April 1, 2010 relates to the requirement of a foreign company to obtain a permanent account number (PAN) i.e. to register with the Indian Tax authorities.

Now, the foreign company is required to furnish a permanent account number to the payer in India. If the recipient fails to provide the PAN, the withholding tax rate would be the higher of the existing rate as per the ITA or treaty, or 20 percent. This would result in additional withholding taxes in India, for which there may not be any credit available in the foreign country.

Also, in the absence of a PAN, the Indian tax authorities will not entertain an applicationfrom the recipient for a lower withholding tax rate.

Currently though, the Indian law requires all foreign companies to file return of income, with respect to income being earned from India – even if the applicable taxes have been paid in India.

It would thus be advisable for foreign companies to initiate the process for obtaining a PAN especially if they are receiving certain royalties/fees/interest from their Indian group companies/collaborators.

Taxability of technical, managerial or consulting services provided by foreign companies to the Indian clients performed outside India
Another important amendment relates to the taxability of technical, managerial or consulting services provided by foreign companies to the Indian clients; when such services are performed outside India. Foreign companies were taking a stand that such services should not be taxable in India, since they were not performed in India and had no territorial nexus with India. Their stand was vindicated by the Supreme Court in the case of Ishikawajima Harima Heavy Industries (288 ITR 408), where the apex court held that services should be rendered as well as used in India for being taxed in India. It therefore held that if both conditions were not fulfilled, the fees for technical services were not chargeable to tax in India.

Recent developments
Samsung case
In this Case the Karnatake High Court observed that every overseas payment would be liable to withholding tax, whether or not that payment was ultimately taxable as income in India.

Prasad Productions case
A special bench of the Chennai tribunal ruled that tax needs to be withheld only on those payments made overseas that are taxable in the hands of the non-resident. That goes against November’s Karnataka High Court decision in the Samsung case, which said that every overseas remittance had to withhold tax unless it had a nil withholding order from the Revenue Department.

The Chennai Tribunal further observed that the taxpayer can decide whether a transaction is taxable and if not, there is no need for a nil withholding order.

Van Oord case
In this case, the Delhi High Court also ruled that withholding tax applies only to payments which are taxable in India

India Singapore tax treaty
The Authority for Advance Ruling (AAR) has recently held that the fees paid by Indian Company for technical services of a foreign company will not be taxed in India under the India-Singapore Treaty. The rationale given behind this decision is that advisory services such as comments and suggestions do not fall within the purview of the term ‘Fee for Technical Services’ under Article 12 of the treaty.

This ruling of AAR came in the wake of the application filed by the Bharati AXA General Insurance Co. Ltd. (BAGICL) to know that if the foreign Company AXA ARC has any liability to pay tax in India in respect of the fee received from the BAGICL.

This ruling has come as a relief to those foreign companies who render support services so as to ensure uniformity and flawless quality in the business dealings of the group entities. Further, this ruling can provide some respite to the companies which do not have a permanent establishment in India as this ruling also state that the payment received by the companies having no permanent establishment in India cannot be taxed as business profits under the Treaty.

Conclusion
Tax treaties
The non‐resident can yet take shelter under the tax treaty, especially India’s tax treaties with countries like Singapore, USA, UK, etc. that have a restricted/narrow definition of fees for technical services.

Advance ruling authority
Although the AAR is binding to the parties appear before the authority and the transaction in relation to which the ruling was given because the ruling was rendered on a set of facts and cannot be of general application. However, it may have persuasive value.

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