Using India’s Double Tax Agreements
India has taken a positive view when it comes to entering into Double Tax Agreements (DTA) with other nations – it now has over 90 such treaties, many of them recent.
DTAs are useful as they enshrine within a bilateral agreement the treatment of many forms of tax – including corporate income tax, individual income tax, withholding tax and dividends tax, amongst others. They are useful not just for companies that have a presence in both nations, but also for trading companies that do not have a permanent presence in India but services to an India-based entity. Such services are typically subject to withholding tax, but effective use of the applicable DTA can halve this burden.
The legal and tax professions are effectively split in India, with a third profession – the Corporate Secretarial position – also prominent when it comes to Indian tax administration. Ignoring DTAs when structuring foreign investments into India can be problematic; these investments should be negotiated up front with the relevant tax officials in India. Failure to do so can result in tax overheads that are far more expensive than necessary.
That said, this problem can be resolved – but only through a firm both qualified to do so and with an understanding of India’s regulations, from both the legal and the tax perspective. India has always been a tax structural play for foreign investors at the startup stage. Companies should ensure that they do not miss out on the benefits of bilateral agreements.
Typical DTA Benefits
Apart from the principal of an individual or corporation not being subject to “double taxation”– being taxed both in one country and then back home – most DTAs also include “tax sweeteners” that international businesses can take advantage of.
These include, but are not limited to, the following reductions:
Dividends Distribution Tax
In addition to a 40 percent corporate income tax (CIT) for foreign investors, India charges a 15 percent dividends distribution tax (DDT) upon profit repatriation overseas. Many DTAs provide for a clause that reduces the dividends tax portion by 50 percent.
Withholding Tax (WT) is charged on an array of service fees billed by a firm’s HQ to a company (which could be either a client or a subsidiary) in India for a service provided by the former to the latter. As profits tax cannot be charged to a company that is non-resident, WT takes its place. The amount of WT varies considerably depending upon the service provided.
Interested businesses should check the applicable rate per service. However, as a general rule of thumb, withholding tax in India is 20 percent of the total invoice value. DTAs can in many cases halve this amount. Services charged by the parent for use of royalties for trademarks by its own subsidiary, for example, may be remitted to the parent at a 10 percent rate – far more preferable to the combined CIT and DDT rate of 55 percent if the money is left in India.
While India-based foreign-invested entities can sign a variety of service agreements with foreign companies, including with their HQ, these agreements can sometimes be looked upon with suspicion as “constructed channels” for sending money between the HQ and its subsidiary. It is up to firms themselves to inform the local tax office in India of their intention to use the DTA – the application for which requires copies of the DTA, Articles of Association, and business license of the company. Permission is required from tax officials in India to reduce the amount of taxes due from a company, as they need to provide an explanation for doing so to their own superiors. Accordingly, a well presented case needs to be made. It is advisable that this involve assistance from a professional firm in India qualified to do so. The tax savings obtained typically outweigh the fees charged for such services.
Where Can I Find India’s Double Tax Agreements?
The Dezan Shira & Associates Resource Library has a full section devoted to, and containing copies of, India’s DTA agreements.
Taking Advantage of India’s DTAs
The practical steps to take when looking to utilize India’s DTAs are as follows:
- Examine whether or not applicable services are included under the specific DTA;
- Examine whether the DTA includes any other benefits such as withholding or dividend tax reductions;
- Include any applicable treaty benefits into your pre-incorporation business plan and Articles of Association;
- Examine any Indian tax registration processes that may require additional registration and advise them of your intent to invoke treaty status.
This is a specific registration process in India. If you have not completed this process or are unsure how to proceed, seek professional advice. The tax amount saved will almost certainly cover any fees involved in year one alone. When completed, your business will be DTA-enacted and save on the varying taxes that would otherwise have been due.
For assistance with applying for tax treaty status for your business in India, please contact Dezan Shira & Associates at email@example.com. We can assist in negotiating with the relevant tax bureau and with preparing supporting documentation.
This article is an excerpt from the February issue of India Briefing Magazine, titled “Using India’s Free Trade & Double Tax Agreements“. In this issue of India Briefing magazine, we take a look at the bilateral and multilateral trade agreements that India currently has in place and highlight the deals that are still in negotiation. We analyze the country’s double tax agreements, and conclude by discussing how foreign businesses can establish a presence in Singapore to access both the Indian and ASEAN markets. “Using India’s Free Trade & Double Tax Agreements” is out now and available as a complimentary download in the Asia Briefing Bookstore.
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