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With globalisation and fast expanding businesses beyond Indian
territory, Indian Companies avail various kinds of services from
Companies and professionals outside India and incur expenses like
Royalty, Fees for managerial, technical or consultancy services,
interest etc. They are therefore required to make payments against
such expenses to non-residents. It is extremely vital to check
whether the payment they seek to make attracts Withholding Tax
(TDS) and if it does, what is the correct rate of tax that is
applicable to that specified payment.
Generally, the scope of taxability of income as well as the rate
of tax is defined under the Indian Income Tax Act and also under
the Double Tax Avoidance Agreement (Treaty) that India has signed
with that country. The assessee has a right to avail the beneficial
provisions (for the scope as well as rate of tax) between the
Treaty and the domestic Act.
In case the Indian Company opts to avail benefit under the
treaty, following conditions will have to be fulfilled and
important aspects needs to be complied with.
Tax Residency Certificate (TRC):
Section 90 (4) of the Income Tax Act has been
made it mandatory for a non-resident who wishes to avail Treaty
benefits to provide Tax Residency Certificate (TRC) to the Indian
Company (the Tax deductor).
TRC is issued by the Tax / Government authority of the country
in which the Non-Resident is the resident of and is a proof that
the recipient is resident of that country and therefore eligible to
get benefit of the treaty that both the countries have entered
into. No other document in lieu of TRC shall be considered for
availing any benefit under the Treaty. Therefore, it is abundantly
made clear in the Indian Income Tax Act that TRC is mandatory
document to get an access to the Treaty.
Rule 21AB of the Income-tax Rules prescribes
that the TRC must contain the information specified in Form 10F.
The information required to be furnished under Form
10F is:
Status of the assessee;
Nationality;
Tax Identification Number in the
country of Residence or Unique number on the basis of which the
person is identified in that country;
Period for which residential status
is applicable;
Address of the assessee in country of
residence.
If the TRC issued by the Government authority contains all the
information as prescribed above (Form 10F), it will be accepted. If
not, in addition to the TRC, the Non-resident will have to provide
a self-certified Form 10F providing the details as stated
above.
If the TRC is not produced by the non-resident, he would not be
able to apply beneficial provisions of the Treaty, if any and the
Indian Company will have to apply the provisions of domestic Income
Tax Act on that payment and withhold the tax accordingly.
Sec 206AA of the Income-tax Act read with Rule 37BC:
The provisions of section 206AA of the Act provide that any
person who is entitled to receive any amount on which tax is
deductible at source, shall furnish his PAN to the
deductor, failing which a higher withholding tax of 20% will be
applicable.
However, anexception is carved
out when payment is made to a
non-resident, in respect of –
payment of interest on long-term
bonds as referred to in section 194LC;
Interest;
Royalty;
Fees for Technical Services and
Payment on Transfer of any Capital
Asset.
In respect of the above specified payments (b to e), the
non-resident deductee shall be required to furnish following
details and documents:
Name, e-mail id, contact number;
Address in the country of
residence;
Tax Residency
Certificate (TRC), if the law of country of residence
provides for issuance of such certificate; and
Tax Identification Number in the
country of residence or a unique identification number on the basis
of which the deductee is identified in the country of
residence.
As can be seen from above, if the Non-Resident recipient of
income does not possess Indian PAN card, it is mandatory for them
to obtain TRC from the Tax Authority in their home country failing
which TDS will apply @ 20% as specified in Section 206AA.
As can be seen from above, it is extremely important to refer
the above relevant provisions at the time of making payment to a
non-resident to check whether the correct rate of tax is applied on
the payment.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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accordance with the powers given under section 17 of the Income Tax Act, 1961, the Central Government has issued draft guidelines in respect of Employees Stock Options ("ESOs").
The amendments in GST law as recommended by the GST Council were passed by the Parliament by enacting the CGST Amendment Act, 2018 and IGST Amendment Act, 2018 on 30 August 2018.
