15 June 2010
In respect of the new requirement for Pan Card to avoid TDS deduction at higher rate of 20% a Foreign Company is being forced to apply for a PAN Card
A Non Resident Co is not liable to withholding tax on its business income from India by virtue of Article 7 of the Singapore DTAA (since it has no PE in India).
And yet the Indian company insists on the Singapore entity obtaining a PAN card to avoid 20% withholding (even though the withholding is to be NIL).
The Indian Company (payer) is unconvinced that there is no need for a PAN card.
15 June 2010
Please find the below detailed article reagarding this.
PAN Requirement for Foreign Companies to Avoid Higher Rate of TDS
With reference to recent amendment in Indian Income Tax Act, 1961 which has made Permanent Account number is compulsory to avoid deduction of Tax at higher rate for all remittances after 1st April 2010.
Complete information is given below:
Requirement to obtain Permanent Account Number( PAN) by Foreign Party with Income Tax Authorities in India. As per section 206AA inserted by the Finance (No. 2) Act, 2009, all foreign parties (individuals, partnerships, companies or any other form of entity) receiving payments from Indian companies after 1 April 2010 need to provide their PAN to the Indian party remitting the payment. If the PAN is not provided to the Indian party, then the Indian party is required to deduct tax on the foreign payment at the highest of the following rates:
1. at the rate specified in the Income Tax Act, 1961 2. at the rates in force (rate specified in the Finance Act or under the double tax treaty) 3. at 20%
Actions needed by Foreign Party
All foreign parties receiving payments from India should apply to the tax authorities for obtaining a PAN and provide the PAN information to the Indian party remitting the payments. For their information, PAN stands for Permanent Account Number. It represents that the party is registered with the Indian Income Tax Authorities.
The process of applying for a PAN is a relatively simple process. Allotment of a PAN takes about 10 days after filing of application.
For filing the PAN application, the foreign company needs to submit an apostil led copy of the Certificate of Incorporation along with the application form.
Consequences of obtaining a PAN on the Foreign Party
All the Indian tax related data of the foreign party will be registered under the PAN and the information will be available to the Indian Tax Authorities in an organized manner if they need further action in the case of some foreign parties.
As per the law, all foreign parties that are receiving income from India are also required to file a tax return in India even if tax has already been paid in India. This is not being followed in practice and the Income Tax Authorities did not have a system to monitor this. However, after obtaining a PAN, the Income Tax Authorities will be able to monitor such compliances. Foreign companies are also required to undergo tax audit if turnover/gross receipts exceed Rs. 60 lacs (businesses) / Rs 15 lacs (professionals) and comply with the transfer pricing provisions and reporting requirements.
Actions needed by Indian Companies/ Professionals
• We are required to inform all our foreign counterparts about the requirement to obtain a PAN. • We are required to include the requirement of obtaining a PAN in all future contracts with foreign parties.
You are requested to inform all concerned and foreign counterparts about the above law and the consequences.
Checklist for PAN Card Application:
Pls. find check list and sample application form for PAN required for obtaining PAN for foreign parties.
Pls. note that Notarized and Consularised copy of Certificate of incorporation - COI (specifying the name, address and date of incorporation).
Notarization and consularisation shall be done by Indian Embassy in respective countries.
In case COI doesn't specify the address of the company, please provide any other certificate (duly Notarized and Consularised by Indian Embassy in that respective country) obtained from competent authority in respective country, specifying the address and date of incorporation.
2 (two) printouts of each application are required and requires to be signed by the Authorized Signatory of the company. In this regard, please note that:
1. Signatures should be made in BLACK ink and within the designated box given in the 'Page 2' sheet. Signatures should not overlap or cross the designated boxes
2. Please also affix company stamp at the places of signatures
Further, please note that no photograph needs to be attached.
Local address should never be provided of any of our office address, it should always be that of the consultant, since that shall create a PE issue and in most cases if they are third parties the obligation should be theirs (we may assist them) and only in case of Kuoni Group entities we need to co-ordinate and help them for obtaining the same.
How does this affect us?
At the time of remittance, the PAN of the foreign party needs to be mentioned in the Form 15CA and Form 15CB required for foreign remittances. As things currently stand, payments fall into the following categories:
• Not taxable in India as per the Income Tax Act, 1961 • Taxable in India at the rates in the Income Tax Act or relevant double tax treaty, whichever is lower • Not taxable in India as per the provisions of the double tax treaties entered into with India
Until now, in many cases, the payments did not attract a withholding tax and the entire gross amount was remitted to the foreign party. In most other cases, TDS of 10% was applied depending on the nature of payment (fees for technical services and royalties). After 1 April 2010, if the PAN is not provided to the Indian party, then the payments will attract a TDS of 20% since in most cases the TDS rate as per the Income Tax Act, 1961 and the double tax treaty will be less than 20%.
This means that even in cases where India does not have the right to tax any income, a tax will be payable in India at 20% or higher due to non-registration of the foreign party with the Indian tax authorities.
This has a more serious impact in cases where the Indian party is going to bear the tax under the agreements.
Will this really apply in practice?
The Income Tax Act, 1961 has been modified to include the above provisions in section 206AA of the Act. Thus, under the Indian domestic tax laws, the provisions shall apply and the higher tax rates shall apply.
However, India has signed double tax treaties with as many as 80 countries which deal with restricting India’s taxation rights on income sourced from India. As per generally accepted internationally tax principles, the double tax treaty overrides the domestic law. Thus the rates under the tax treaty or domestic law, whichever is lower should apply on the payments. As per the generally accepted principles, any unilateral change in Indian tax law cannot override the bilateral double tax treaty signed by two sovereign nations.
Nonetheless, it is expected that the Income Tax Authorities may disregard the generally accepted international tax principles and take action against Indian parties not complying with the provisions of section 206AA as outlined above, resulting in litigation.
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