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Withholding Taxes/DTAA

Indian companies and non-resident companies with India-sourced income must withhold taxes on any payment to another party that is subject to withholding tax in India. If the payer believes that only a portion of the amount is subject to tax, the payer can apply to the assessing officer of the Tax Authority to determine the appropriate portion that is subject to tax.

International double taxation has adverse effects on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the taxpayer. The domestic laws of most countries, including India, mitigate this difficulty by affording unilateral relief in respect of such doubly taxed income.

Section 90 of the Indian Income Tax Act authorizes the government of India to enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents.

A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment, services, technology etc.

Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure.

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 New 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 PAN 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.

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