Urgent Query: Does TDS have to be deducted by US Company?

This query is : Open

Querist : Anonymous

Querist : Anonymous (Querist)

03 August 2010 Hello,

I have an urgent query..I am planning to move back to India and continue working for my US Company (I can do the job remotely). I have been a Non Resident for the last 10 years.

My role is of a Supply Chain Analyst...primarily conducting analysis to help the account management, sales and business operations teams.

My company doesn't have any establishment in India and doesn't have a PAN number etc.

1. If they continue to pay me in USD, do they have to withhold any TDS for my Indian taxes?
2. Can they get a PAN number without having any presence in India?

3. Or can they continue to withhold US taxes like they do now and I can claim the credit (based on the DTAA agreement between US and India) when I file my Indian Taxes (since I will become an Indian Tax Resident after the first year)?

Thanks a lot for your advice!

VINOD ARORA

VINOD ARORA (Expert)
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04 August 2010

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CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
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04 August 2010 I would like to differ on the following grounds :

1. If the US company continue to pay you in USD, they are liable to withold taxes payable in India. In case of CIT vs. Eli Lilly and Co. (India) P. Ltd. (2009) 312 ITR 225 (SC)the revenue contended that Income-tax Act imposes an obligation to deduct tax on every person responsible for payment of salary to an employee. This is irrespective of whether the employer is in India or outside India or whether the payment is made in India or outside India. This contention was upheld by the Supreme Court.

2. The US Co. can obtain PAN/TAN without presence in India. The address to be given will be that of the United States.

3. As you will be rendering services from India, your income will be fully taxable in India only & not in US. As such, the US Co. cannot withhold taxes in US and you claiming credit on such taxes is not possible - Article 16 of the Indo-US DTAA.

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Querist : Anonymous

Querist : Anonymous (Querist)

04 August 2010 Mr. Nayak,

Thanks for your response. With regards to No.3, while I am employed by the US company and living in India my paperwork for legal residency in the US could still be in process (My process has been going on for 4 years but there is still a backlog of 5-6 years).

During this time while I am in India in order to keep my option open of perhaps of moving back to the US in the future once I receive the Green Card I would file US taxes every year as well.

In this case, when I file taxes in the US every year, I wouldnt have any US taxes withheld from the company.

So Would I be able to show the taxable income in India as Global Income which is eligible for Foreign Income Exclusion?

Basically how would I be protected against Double Taxation when I file the US taxes?

Best Regards,
Sid

VINOD ARORA

VINOD ARORA (Expert)
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05 August 2010 Mr Nayak, Thanks for correcting my mistake.

Querist : Anonymous

Querist : Anonymous (Querist)

05 August 2010 Thanks to both of you.

After reading Mr. Nayak's response I got another idea . I do not think my company would be very open to go through the withholding process for just one employee ...also wouldnt this also expose them to some tax risk (in terms of now having some sort of physical presence in the country?)

Instead of this, what if I was to Incorporate a company in India and use that company to Bill the US company for my services as a consultant?

1. If they are open to this, what are their tax implications? I am assuming I would invoice them on a monthly basis for my time and other expenses and they would pay me in USD. Would they be liable to any tax in India?

2. What would be the best setup for me (Pvt Ltd, Incorporation, Sole Prop)....and what % Tax would I end up paying (I will need to compare what that consultant rate would be so that I can take home almost the same pay as if I was their salaried employee).

Thanks a lot for all your advice....I sincerely appreciate it!!

Best Regards,
Sid

CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
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05 August 2010 1. If you work in India as a consultant for the US Co. and invoice them on monthly basis, the US Co. is not liable to any tax in India. They are also not liable to withold any taxes in India or US on payments made to you on your bills.

However, such income will be fully taxable in India. You can claim deduction for expenses incurred by you in relation to rendering such service to your client.

2. To start off with, I would suggest you to go for sole proprietorship. As your business grows & when you are able to secure more clients, you can think of starting of your own Consultancy Co. in future.

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2010 Thank you Mr. Nayak.

1. If i create a sole proprietorship and become a consultant for the US company is there any risk of this being seen as a PE for the US company if they are my only client?

2. Would the tax rate for the consultant income be 33% on the Income or on the Profit made by the company?

Thanks!

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CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
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06 August 2010 1. When you are rendering services only as a consultant, it cannot be seen as a PE for the US client even when the said US Co. is your only client.

2. Normal tax rates would apply on the profits made by you as a consultant (sole proprietor)
upto 1.6 lakhs - NIL
1.6 lakh to 5.0 lakh - 10%
5.0 lakh to 8.0 lakh - 20%
above 8.0 lakh - 30%

Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2010 Thank you Mr. Nayak. Your responses are very helpful.

In the sole proprietor other than the 30% tax rate on the profits made by the consultant,would there be a corporate tax on the company profits as well...or would this apply only if it was another kind of setup such as PVT ltd.?

CA. Pradeep Nayak

CA. Pradeep Nayak (Expert)
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07 August 2010 Your question is not clear...

Querist : Anonymous

Querist : Anonymous (Querist)

08 August 2010 Hello Mr. Nayak,

I will provide an example to try to make the question clearer:

I am presenting two options to my company to maintain a relationship with my US Company upon my return to India.

Option # A - I continue to be an employee of the US Company. In the case as you have mentioned in your previous response the US Company would be required to withhold Indian taxes from my paycheck after obtaining a PAN/TAN number.

My understanding is since:
1. They have no legal entity, PE and no business Interests in India
2.My role will be to provide services to the company for US business only
3.My role will not be a revenue generating role for the company
Other than withholding my Indian tax, the US company bears no tax risk or liability in India.

In this option, if they were to pay me $40,000 (Approx INR 18 Lakhs) I would pay 30% tax and take home around $28,000 (Approx INR 12.6 Lakhs).

Question # 1 -Is this understanding accurate?

Option # B – If my US company does not want to go through the process of getting a PAN/TAN number and withholding Indian tax for just one employee, I will present this option which is :
1.I will open a company in India and become an independent consultant to this Indian company
2.My US Company can enter into a contract with the Indian company
3.The US company pays the Indian company in USD based on a Monthly Invoice for the consultant’s services

In this option, the US Company would not have any tax risks and no withholding obligations.
If I wanted to take home the same pay as a consultant , I would bill the Indian company $40,000 and pay 30% tax on it.

Question #2 - If the Indian company in turn bills the US company $50,000 and their total costs were lets say $45,000 what tax rate would apply for the $5,000 profit that the Indian company makes?

I am trying to calculate what the US Company would be spending in either option.

Best Regards,
Sid

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