Overview on Withholding taxes in India.
There is a lot of confusion among international companies not registered or having no presence in India when it comes to with holding taxes. Our goal through this literature is to provide useful and resourceful information to all our readers. So what is withholding tax? Well it is nothing but a type of taxation imposed by the Indian govt on the payer where it is mandatory for him to hold tax and pay the same to the govt. This type of tax is quite common and essential while getting paid on invoices.
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Why do you have to pay withholding tax in India?
Chapter XVII B of the Income tax Act provide for deduction of tax at source at the time of making payment by any assessee. It also covers all payments made to Non Resident. Section 195 deals with deduction of tax at source at the time of making any payment or at the time of crediting any sum to a Non Resident.
Section 195 of the Income Tax Act, 1961 provides “Any person responsible for paying to the Non Residents, not being a company, or to a foreign company, any Interest or any other sum chargeable under the provisions of this Act (not being Income chargeable under the head salaries) shall, at the time of credit of such Income to the account of the payee or the time of payment thereof in cash or in Cheque or in draft or in any other mode, whichever is earlier, shall deduct Income tax thereon at the rates in force.
There is no threshold limit defined in section 195, even Re. 1 is covered under section 195. All payers are covered irrespective of Legal Character i.e. Individual, HUF etc.
H’ble Supreme Court in the case of EILY LILY 312 ITR 225 views that:
The purpose of TDS provisions in Chapter XVII B is to see that the sum which is chargeable under Section 4 for levy and collection of income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident.
Get a PAN (PERMANENT ACCOUNT NUMBER) – if you want to reduce your withholding tax liability.
The amendment made applicable from 01st April, 2010 requires every recipient of Income to Obtain Permanent Account Number.
PAN is a ten-digit alphanumeric number issued in the form of laminated card by the Income tax department of India.
As per section 206AA of Income tax act, if the recipient of Income fails to provide PAN, then rate of withholding tax shall be at higher of following rates:
- Rate specified in relevant section depending upon nature of payment;
- Rates in force (rate specified in ITA or in tax treaty);
- Rate of 20%.
So it is advise for all to start applying for PAN, if you do not have one.
How to file with-holding taxes via INCOME TAX FILING?
Section 139 of Income tax Act, 1961 speaks about filing taxes in India. As per Section 139(1), every company is required to file taxes in India irrespective of level of Income.
“A body corporate incorporated by or under the laws of country outside India” is also covered within definition of company as defined in Section 2(17) of the Income Tax act.
Section 139(1) comes attracted only when transaction entered into by the assessee is liable to taxes in India. This view is affirmed by Hon’ble AAR in the case of Vanenburg Group B.V., 289 ITR 464.
TAXABILITY OF BUSINESS INCOME
Any profit arising to foreign enterprise from Business in India will be taxed in India only if that foreign enterprise is having Permanent establishment (PE) in India. Only profits attributable to that PE will be taxed in India.
Permanent establishment means:
- A Place of Management;
- A branch;
- An office;
- A factory;
- A workshop;
- Or any other place of effective management.
Business of foreign enterprise should be carried through PE. Existence of PE in India is a must condition for tax-ability of business profits in India of a foreign enterprise.
A foreign enterprise and a PE in India will be considered as a separate entity and transactions between two must be carried on arm’s length price.
TAXABILITY OF FEES FOR TECHNICAL SERVICES AND ROYALTY
In general sense, Fees for Technical service is any consideration for rendering of technical, managerial services. Fees for technical services is defined in section 9(1)(vii) of Income tax Act.
Hon’ble Supreme Court in the case of Ishikawajima-Harima heavy Industries 288 ITR 408 held that in order to be chargeable to tax in the hands of the non-resident, fees for technical services had to be rendered in India as well as utilized in India.
Further above decision is overruled by Finance Act 2010 by adding an explanation to Section 9 which clearly explains that Fees for technical services of a Non Resident shall be deemed to accrue or arise in India and shall be included in total Income whether or not:
- the non-resident has a residence or place of business or business connection in India; or
- the non-resident has rendered services in India.
It is now clear from above explanation that Fees for technical services would attract withholding tax if services are utilized in India.
Royalty is generally a consideration received in respect of transfer of rights, rights to use property and imparting of any information. Royalty is broadly defined in section 9(1)(vi) of Income tax Act.
Taxability of payment made for softwares has always been a subject of litigation. The decisions in Indian courts for software payments have mainly focused their decision on treating this revenue as ‘Royalty’ or ‘Sales’ Income. Income which is characterized as ‘Royalty’ would obviously attract Withholding tax, whereas any Income characterized as
‘sales’ Income would not be subject to tax in absence of Permanent establishment in India.
It was held by Karnataka High court in the case of Samsung Electronics Co. Ltd that payment made for purchase of copy of a computer program for internal business use as well as for resale to end user is taxable as royalty and would attract withholding tax. Further Supreme court by reversing the order of high court, held that withholding provisions would apply only when payments are chargeable to tax in India.
With the Finance Bill 2012, the government would like to tax all payments made for software as ‘Royalty’ as they consider this payment toward ‘license to use’. This amendment is retrospectively made with effect from 01st June, 1976 i.e. AY 1977-78.
Withholding TAX RATES
Withholding tax rate in connection with Income arising in India can be obtained by:
- Determining the tax-ability of Income as per Indian tax laws;
- If Income is taxable as per Income tax Act, then refer to tax treaty between India and Residence country.
- Compare the rates as per Income tax Act and DTAA.
- Apply the rate whichever is beneficial to assessee.
RECENT BUDGET HIGHLIGHTS
Section 9- Major Amendment is proposed in this section which deals with “Income deemed to accrue or arise in India”. An explanation shall be inserted in sub section (1) and shall be restrospectively effective from 01st April, 1962.
Explanation- For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share of the interest derives, directly or indirectly, its value substantially from the assets located in India.”
Supreme Court decides in favor of Vodafone in January, 2012 and held that government has no jurisdiction over vodafone’s purchase as the transaction took place in Cayman Island.
However, the retrospective amendment in Section 9 have now overruled supreme court judgement in Vodafone case, which won Rs. 11000 crore tax dispute case against Indian tax authorities.
Section 115BBA- This section covers taxability of Non Resident sports person, sport association and institutions and they are presently taxed at 10% on their gross earning in India. Now, with the Finance Bill, 2012, this facility is extended to Non Resident entertainers, who earns from their performances in India. Tax rate is also extended from 10% to 20% and revised rate for deduction will be applicable from 01st July, 2012.
Section 90- According to amendment proposed in Section 90 of Income tax act, if an NRI wish to avail DTAA rates for Financial Year 2012-13 will have to submit Tax residency certificate (TRC) to deductor. TRC is issued by the authorities of country in which NRI resides. Rules in this context are still pending with Indian tax authorities.
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