Receiving income in India? Watch out for withholding tax implications


 Globalization has led to a rapid exchange of trade between countries, and there are millions of professionals providing their services to customers outside their home country. Consequently, there are millions of people visiting India and doing business. As long as you are a foreign national doing business in India, you are liable to file your income tax payment. Based on your duration of stay in the country you may be treated as a resident or a non-resident. While a resident has to pay taxes on his or her global income, the non-resident pays taxes on the income received or accrued or raised in India.

According to the income tax laws, an individual staying in India for 182 days or more in a financial year or 365 days or more during the preceding four financial years is treated as a resident. Others are categorized as non-residents. There exist different penalties for not filing income tax payment  under different sections dictated by the taxation laws for residents and non-residents in India. For better legal help, it is advisable to approach a good lawyer.

What Do You Mean By Withholding Tax?

Withholding tax refers to the amount which the payer is obligated to withhold while making payment under specified head such as rent, commission, salary, contract, professional services, etc. The scope of taxation is briefly explained below in term of withholding tax implications:

  • In case of technical or professional services offered in the country, the fee is subjected to and will undergo withholding of 10% and other surcharge or fee applicable based on the taxation laws. Also, the fee of professionals such as doctors, engineers, or teachers, etc. will be exempted from tax cuts unless they have a fixed base in India or their duration of stay exceeds 90 days in the country.
  • The current slabs of withholding taxes for payments made to non-residents under different sections of laws include Interest @ 20%, No tax on dividends paid by domestic companies, Royalties @ 10%, allied services to companies @40% of the income and to individuals @30% of the income.
  • Consequences of failing to deduct or withholding taxes and submitting the same to the government include a plausible fine, interest payment or even imprisonment in cases of concealing income which may indicate transaction of black money which is bad for any economy.
  • If you are a foreign national coming to India for a small assignment and your duration of stay does not exceed 90 days then you may claim for exemption from income tax payment in India provided you are on foreign company’s payroll, and that company is not engaged in any trade or business in India.
  • The transfer of shares of an Indian firm by a non-resident attracts taxes on capital gains. If the shares are held for less than 12 months, then these will be treated as short-term capital gains and attract a tax @15%. Other cases are treated as long-term capital gains taxed at 10% plus other surcharges or fee as dictated by the Income Tax Law.
  • Finance Tip: The Permanent Account Number (PAN) is an identification number given to each taxpayer which is compulsory for making income tax payment. If you do not hold a PAN number in India, then you will be subjected to withholding at 20% or suitable rates as specified in Income Tax Act in the country. However, you may avail relaxation if you can provide other details like Tax Residency Certificate (TRC), Tax Identification Number (TIN), address details, balance sheet, etc. as demanded by the authorities for the same purpose.
  • Finance Tip: The laws dictate that withholding of taxes is an obligation of the payer and not the payee. However, the payee must provide details such as TIN, a copy of the TRC, etc. to keep a check on proper withholding rates that they are subjected to by their employers. Thus, it helps to ensure that you are not being cheated or overcharged.

Business thrives on abiding by the existing laws of taxation and all other laws in general for the transparent transaction and healthy economic activities. It also fosters the growth of a friendship among different nations and promotes the signing of treaties or memorandum of understanding between nations owing to excellent trade relations. In a globalized world, it is essential to practice fair business in foreign countries. This is because when you are involved in economic activity, you represent not only your company but also your country. Before doing business, ensure that you have thoroughly studied all the existing laws in the country and have consulted a lawyer to ensure smooth trade. Ensure that all of your financial statements are regularly updated and are for ease of doing business at home or abroad.