Calculating Withholding Taxes in India

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Aug. 9 – Withholding taxes are a government’s way of making sure that the proper taxes are paid on an item by way of either withholding or deducting the relevant tax amount from an individual’s or an enterprise’s income. They are of particular note to international companies doing business with India yet without a presence there, as some services provided to Indian customers can be subject to withholding tax. They may also impact on foreign subsidiaries of international companies in inter-company agreements.

Withholding taxes in India
Chapter XVII-B of India’s Income Tax Act provides for the deduction of taxes at the source of any payments made by an assessee. Furthermore, section 195 of the Income Tax Act casts an obligation on the person responsible for the payment to the non-resident to deduct the relevant tax amount at the source at the time of payment or at the time that the sum is credited to the non-resident’s account.

These provisions also apply to payments made to non-residents.

Withholding taxes for NRIs and foreign companies
Withholding tax rates for payments made to non-residents are determined by the Finance Act that Parliament periodically updates. The current rates are:

  1. Interest on investment income – 20 percent of gross amount;
  2. Dividends – 10 percent;
  3. Royalties – 25 percent;
  4. Technical services – 25 percent;
  5. Any other services – individuals – 30 percent of net income; and
  6. Companies/corporations – 40 percent of net income

Note: the above rates are for general reference only, and are only valid for income earned by companies based in countries with which India does not currently have a double taxation avoidance agreement (DTA). Details of the countries India has a DTA with are here:

India's International Spread of Double Tax Agreements

India’s International Spread of Double Tax Agreements

Director of income tax (international taxation)
Statutory functions in respect of taxation of foreign companies and non-residents and withholding taxes payments on amounts to be remitted abroad are performed by the relevant Director of Income Tax (International Taxation).

There are currently eight DITs located throughout India, namely in Delhi, Mumbai, Kolkata, Chennai, Bangalore, Pune, Ahmedabad and Hyderabad.

Permanent account numbers and filing of returns

In 2010, the Indian government passed various amendments relating to the requirement that a foreign company must obtain a permanent account number (PAN) to register with the Indian Tax authorities. As such, foreign companies are now required to furnish a PAN when selling to an Indian company.

If the recipient fails to provide the buyer with its PAN, then the applicable withholding tax rate would be based on the existing rates listed above, or at 20 percent (whichever is higher). Furthermore, in the absence of a PAN, Indian tax authorities will not allow foreign companies to apply for lower withholding tax rates.

Currently, Indian law requires that all foreign companies file returns on all income earned in India even if the applicable taxes have already been paid in India. It would thus be advisable for foreign companies to initiate the process to obtain a PAN, especially if they expect to receive certain royalties/fees/interest payments from their Indian group companies/collaborators.

Taxability of technical, managerial or consulting services provided by foreign companies to Indian clients performed outside India

Another important amendment relates to the taxability of technical, managerial or consulting services provided by foreign companies to Indian clients when such services are performed outside of India.

However, foreign companies decided to take a stand against the issue, citing that such services should not be taxable in India since they were not actually physically performed in India. This culminated in the Indian Supreme Court case of Ishikawajima Harima Heavy Industries (288 ITR 408), where the apex court held that services that are both rendered and used in India are to be taxed in India. Simply put, the Supreme Court’s opinion was that if both of conditions were not fulfilled, then the fees for such services are not to be charged as a tax in India.

Relevant Case Studies

Samsung case

In the Samsung Case, the Karnataka High Court observed that every overseas payment would be liable to withholding taxes despite the payment ultimately being taxable income in India or not.

Prasad Productions case

A special bench of the Chennai tribunal ruled that tax needs to be withheld only on payments made overseas that are taxable in the hands of the non-resident. However, that ruling is contradictory to the 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, however, further observed that it is up to the taxpayer to decide whether a transaction is taxable. If not there is no need for a nil withholding order.

Van Oord case

In this case, the Delhi High Court ruled that withholding taxes apply only to payments that are taxable in India.

Vodafone case

Retrospective amendments were created to further clarify the legislative intent of the source rule of taxation on non-residents in India, particularly in respect of indirect transfers of underlying assets.

Under the proposed amendment, all persons (whether residents or non-residents) who have business connections in India will be required to deduct taxes at source and pay them to the Indian government even if the transaction is executed on foreign soil. This amendment is crucial because a review petition by the government is currently pending before the Supreme Court, which may now revise the changes in tax laws when it revisits its previous judgments.

India-Singapore tax treaty

The Authority for Advance Ruling (AAR) held that fees paid by Indian companies for technical services provided by a foreign company are not taxable in India under the India-Singapore tax treaty. The rationale given behind this decision is that advisory services do not fall within the purview of the term “Fee for Technical Services” under Article 12 of the said treaty.

This AAR ruling came upon the wake of an application being filed by the Bharati AXA General Insurance Co. Ltd. (BAGICL) to see if a foreign company is liable to pay taxes in India in respect of the fees received from BAGICL.

This ruling has come as a relief to foreign companies that render support services in that it ensures uniformity and flawless quality in future business dealings. Furthermore, this ruling can provide some respite to companies that do not have a permanent establishment (PE) in India as it also states that payments received by companies that do not have a PE in India cannot be taxed as business profits under the treaty.

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33 Responses

  • K.Ravi says:

    For works contract withheld service tax @ 4.944% recovering( Govt. sector)
    This amount with holding from the total value of work done from the fund of
    the station (Govt fund)[ not from the contractor] Afterwards contractor remitting
    this amount to Central Excise Dept and claiming this amount from the withhold Dept. Sir we want to know what is the procedure to remit the withhold service tax by us to central excise dept.i.e. the time limit to deposit the w.h. s.tax OR else we have to keep this w.h.s.tax with us in Govt. account and to reimburse the contractor when he remit this amount into central exise dept. pl. clarify.

  • Gunjan Sinha says:

    Hi Ravi,

    For registration the concern has to be file forms under service tax and then ST shall be paid on due date, further if service receiver is already registered under Service tax then registration has to be amended by adding additional service.

    Under scheme of works contract mechanism, service tax applicable is paid into the government account under reverse charge. The mechanism for reverse charge is applicable in case the person providing the service is Individual, Partnership firm or HUF and Secondly, the service is provided to a registered entity. As the mentioned conditions are satisfied, the receiver of the service is responsible to pay the 50% of the applicable amount of service tax.

    Thanks
    Gunjan

  • R Kumar says:

    Hi,

    We get some artwork done from international artists in UK. It is small scale and would like to know
    what tax has to be withheld . For eg if we have to pay them Rs. 1Lakh what part of Rs.1Lakh has to be withheld as tax.

  • Gunjan says:

    Hi Ravi,

    If the artist in UK is providing service in his individual capacity, without having base/ place in India, to provide such services in India and is also not in India for more than 90 days, in such a scenario no TDS shall be required to be deducted. The same is termed to be covered under independent personal services.

    Regards
    Gunjan

  • HI!
    We buy right to use iPad application from a foreign company.It is downloaded free of cost through I-store but separate payment is made to activate full feature of the software.The manufacturer issues a password via email to activate the full feature of the application.The manufacturer is a registered company located in Europe.
    Do we need to deduct TDS on every transaction.What is the rate.
    Regards,
    Kamath

  • Gunjan Sinha says:

    Hi Kamath,

    The payments are subject to withholding of tax, the rate prescribed is 20 % for a foreign company not having PAN in India.

    Best Regards
    Gunjan

  • Gurmail says:

    Hi,
    We are a UK based company that is importing a cloud-based software to India. We supply distributors in India with a code – so no software to install or download. The end user just activates using the code, all online. We don’t have any PE in India and are talking directly to the distributors from the UK. The codes are printed in India and shipped directly to the distributors. Will TDS apply to us? So when the distributors are invoiced will they need to deduct TDS before paying the invoice which is in GBP?

    Kind Regards,
    Gurmail

  • Gopal says:

    Hi,

    Our company imported 50 container from China and given freight forwarding contract to a china company. China freight forwarder company raised a invoice of $79K to us.

    What with holding tax , we need to deduct before transfering the payment to chinese freight forwarder

    Thanks,
    Gopal Krihna

  • Gunjan Sinha says:

    Hi Gurmail,

    The UK company is providing software based application services in India, the cloud based services as a concept is at a very nascent stage and it’s taxability is classified under fees for technical services in India, subject to withholding taxes in India @ 15%, as per the rates in effect mentioned in Indo-UK treaty. Further, in case the service provider is not having PAN in India, the concern is liable for withholding tax rate @ 20%.

    Regards
    Gunjan

  • Gunjan Sinha says:

    Hi Gopal,

    Assuming that the Chinese company is not providing any service beyond the service of delivering the consignment at port in India, the TDS shall not be deducted on the payments made to Chinese company.

    Best Regards
    Gunjan

  • Aparajith says:

    Hi,

    We have a healthcare technology tie up with a company in USA and they have shared the technology details for use in India for the end consumer.

    They are not having any PE in India. We are an independent organisation in India who have taken the technology rights and providing the services in India.The total cost of the technology is $300,000/-

    Would there be a tax liability wherein we need to deduct TDS? And if yes, what would be the percentage

    Thanks in advance.

  • Gunjan Sinha says:

    Hi Aparajith,

    Thanks for your query.

    The remittance made is for “right to use the technology”, this is considered as payment in nature of Royalty and remittance is subject to withholding taxes. As per India-US DTAA, Tax applicable is @ 25% in the absence of PAN and 15% otherwise.

    Best Regards
    Gunjan

  • Abbey says:

    Hello,

    Kindly provide me a guide on how Fees for Technical Service derived from Nigeria by a company in India to be tretaed.

    should the Nigerian Company Withhold Tax?

    should the Indian company request for Withholding Tax Cerifiicate from Nigeria?

    Regards
    Abbey

  • Gurmail says:

    Hi Gunjan,

    Thank you for your reply to my question of UK company selling cloud-base software.
    But we do not class this as fees for technical services. We are selling the product via activation codes to distributors in India who are then just reselling this to dealers, who then sell to end-users.
    We are not selling this via the internet/website. We send a boxed product with the code inside to the distributors. According to the advice in UK this should be classed as business profit in India and not technical services or royalty fees.
    Please advice what you think on this, as I would really appreciate it.

    Thank you
    Kind regards,
    Gurmail

  • Gunjan Sinha says:

    Hi Abbey,

    As for the transaction concerned in Nigeria, laws of Nigeria may require to with hold taxes, local laws need to be complied; for the India transaction, in case the with-holding tax is effected in Nigeria than, Indian company must require with-holding tax certificate which will enable them to secure the requisite credit for tax deducted and paid in Nigeria.

    Best Regards
    Gunjan

  • Abbey says:

    Hi Gunjan,
    Thank You very much for your reply.

    i will appreciate your help further

    In a situation where the Tax Burden have been shifted to the Paying Company ,will the WHT Certifcate still be required?

    For example a payment of $ 100,000 is due, the beneficiary who have rendered a service further grosses up the amount by 10% to make the payment $111,111.11 so as to shift the Tax burden to the Paying Company.

    Thank You

    Abbey

  • Gunjan Sinha says:

    Hi Abbey,

    Considering above example from the stand-point of an Indian concern liable to pay outside India;
    In such case, the Indian concern shall be liable to with-hold taxes in India before making the payment as with-holding Tax is a pre-requisite for eligibility of amount of expense to be claimed, at the time of filing of IT return. At the time of Tax Audit said expense may be disallowed, it shall also be mandatory for Indian concern to pay With-held tax to the government account and issue WHT certificate.

    In the absence of WHT certificate, the Indian concern, at the time of filing of return, shall not be able to claim the credit of tax deducted and paid on their behalf, outside India. Though in the given scenario the tax burden has been shifted and the WHT certificate holds least relevance.

    Best Regards
    Gunjan

  • Thomas Pin says:

    Dear Sir,

    Could help to clarify what’s the withholding rate for the royalty with PAN? We are a company registered in HK with the royalty income by licensing our logo/trademark to India company to publish the local version magazine. And we were told recently that we can’t get the better rate now even with the PAN. Unless HK has the DATT with India, or the tax rate will be 25%. And it looks PAN is not necessary for the non-resident company now. Is it true?

    Best regards,
    Thomas Pin

  • Gunjan Sinha says:

    Hi Thomas,

    DTAA between India and Hong Kong is being considered, and may get approved as we read this, in the absence of DTAA the provisions require 25 % with holding tax for the Royalty Income.

    The availability of PAN shall hold the relevance as that shall help the concern located in Hong Kong to claim credit of Tax deposited in India. However, the credit for taxes paid in India is subject to tax laws as applicable in Hong Kong.

    Best Regards
    Gunjan

  • Manish Agarwal says:

    Hello Gunjan,

    My company is a Hong Kong based company and we have sent an invoice to one of our client. The invoice is for yearly subscription of our legal database which is in digital version. However the client in India are asking for few documents such as TRC, Form 10 F and PAN. My question is that, since there is no DTAA between India and Hon Kong is TRC applicable and what percentage of TDS the client should deduct provided we have a PAN card but no TRC.

    Thank You
    Manish

  • Gunjan Sinha says:

    Hi Manish,

    The TRC is required for claiming the benefit of tax deducted in other country, since there is no DTAA between India and Hong Kong, we would need to study the transaction with company in detail for a definite reply, however there may be 20 percent of TDS applicable in this transaction.

    Regards
    Gunjan

  • Thomas Pin says:

    Dear Sir,

    I’ve checked the website of Income tax department-India and tried to find the TDS rate for non-resident, but still not sure if my understanding is corret or not. Our company based on HK worked as the sales agent for the exhibition organized and held in India. Our major responsiblity is to do the overseas exhibition booths sales abroad, and the organizer/India company will pay us the commission. What’s TDS rate for this kind of coimmission? I read some articles and found that there’s seems under some circumtance has not TDS issued since all these sales done abroad. Is our case applicable for no TDS?

    Regards,
    Thomas Pin

  • Gunjan Sinha says:

    Dear Thomas,

    Since the exhibition was carried out in India, HK does not have a double taxation avoidance treaty in place with India, hence the TDS rate applicable is 40% with surcharge and education cess as applicable.

    Kind Regards
    Gunjan

  • Thomas Pin says:

    Dear Gunjan,

    Thanks for your explanation. Is it because there’s no written article to show the rate for commisson income and been catergorized to “any other income” and subject to 40% TDS rate?

    Regards,
    Thomas Pin

  • We are a corporation in the US that is signing a deal to provide technical services to a Indian based corporation. Our consulting work will be performed in the United States and we will be paid via wire transfer.

    Since a DTTA exists between US and India can the Indian company forego the withholding tax completely? Making us liable for the entire tax in the US. Currently they are saying they need to with hold 25%.

    Is an Indian PAN required regardless since we are doing business with a company in India? Or is it only required for companies doing business with an Indian company that do not have a DTTA. If a withholding is required do I need the PAN to then claim the tax credit back in the US? And if I have a PAN do I then need to file tax forms in India.

    Many thanks,
    Alicia

  • It looks like
    1) We need a PAN asap, requires payment, consular fees and verification of address.
    2) Without the PAN we default to 25% tech services withholding or 20% minimum, which ever is higher
    3) Having a PAN will allow us to claim our DTTA where they will not have to withhold.

    Right?

    Thanks,
    Alicia

  • Dear Gunjan,

    We are an India based advertising agency and are planning to undertake Market Research in Nigeria for our client based in Columbia.The payment for this Market Research (The amount will be exactly the same as what we would have to pay the Market Research company) would be made by our client (based in Columbia with whom only we would be signing a contract. The Market Research comapny will have no dealing with our client.) to us in India and we would then have to pay the Market Research company which is based in Nigeria. The results of the market research would be primarily used to create advertising campaigns for the African market.

    Our query is: Does the payment to the Nigerian company attract Withholding Tax in India?

    Would be grateful for your advice.

    Regards and best wishes,

    Turab

  • Gunjan Sinha says:

    Hi Alicia,

    PAN of the permanent account number is the tax identification number for an entity in India, PAN reduces the withholding tax rates in India.

    Double taxation avoidance agreement existing between the countries allows them to benefit the tax payers by reducing the double taxation burden on same transaction in both the countries.

    Regards
    Gunjan

  • Gunjan Sinha says:

    Dear Turab,

    The payments made by an Indian company is subjected to with holding of taxes, you will need to deduct the taxes from the fees paid to the marketing company.

    Best Regards
    Gunjan

  • Gunjan Sinha says:

    Dear Thomas,

    The withholding tax rate of 40% is applicable on the payments made, along with surcharge and education cess as applied.

    Best Regards
    Gunjan

  • Dhara says:

    Dear Gunjan,

    We are a liaison office in India and our Asia Pacific Headquarter is in Thailand. We are going to receive order from Customer and they are asking for TSR, PE Certificate and Form 10F. Our Tailand office do not have TSR. What is the alternate solution for this? If do not give this documents, customer withhold the taxes. Also I want to know what are the % of withholding tax?

    Does Liaison office count as Permanent Establishment of our Thailand company?

    Regards
    Dhara

  • Gunjan Sinha says:

    Dear Dhara,

    Please help me with full form of TSR, the taxes withheld are based upon the nature of transaction undertaken with the customer in India, further the Liaison office is considered as a permanent establishment for the purpose of income tax.

    Regards
    Gunjan

  • Patrick says:

    Hi,

    I have an agreement with a foreign company (our parent company).
    There are 3 parts of the agreement as follows:
    1. Design, implementation, project plan, turnkey construction and operational handover of facilities
    2. Buying of equipment for testing purposes in the parent’s company facility for a Testing center which will be providing services to Indian subsidiary (these equipments will not be forming part of assets of Indian subsidiary)
    3. Reimbursement of duties for purchase of above equipments

    Can you help me with the TDS rate applicable on above three items?

    Foreign company has PAN card

    Many thanks for the help in advance!

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