How to calculate withholding tax rates in india?Is tax to be withheld on payments made by Indian company to a foreign company?
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: Interest – 20 percent of gross amount Dividends – 10 percent Royalties – 20 percent Technical services – 20 percent Any other services – individuals – 30 percent of net income 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.