India withholding tax implications on payment to non-residents & related compliances
Executive summary
This article offers U.S. businesses guidance on complying with Indian withholding tax (WHT) regulations when dealing with Indian customers. It details the types of income subject to WHT, the required documentation for claiming tax treaty benefits and practical steps to prevent higher tax rates and refund delays. By planning effectively and understanding withholding rules, businesses can ensure timely payments and minimize negative impacts on cash flow.
WHT regulations in India on payment to non-residents–A high-level overview
Indian tax law generally mandates that any person responsible for making payments to a non-resident for Indian-sourced income subject to WHT must deduct income tax at the prescribed rate at the earliest of either the time of credit or payment.
Income is deemed to accrue or arise in India if:
I. It is received directly or indirectly through:
- Or from any business connection in India.
- Or from any property in India.
- Or from any asset or source of income in India.
- The transfer of a capital asset situated in India.
II. It is earned as ‘salaries’ in India.
III. It is a dividend paid by an Indian company to a non-resident shareholder.
IV. It is income by way of interest, royalty or fees for technical services.
Any income generated from a business connection in India through a ‘permanent establishment,’ either under domestic law or an income tax treaty, is subject to tax compliance in India. A business operating via a permanent establishment is obligated to report, file and pay Indian income taxes. A non-resident’s income not generated via a permanent establishment, but considered sourced in India, such as dividends, interest, royalty payments and fees for technical services, is subject to an Indian withholding tax that is withheld by the payor. If the amount was withheld under the provisions of domestic law, then the non-resident would not be obligated to report, file and pay additional Indian taxes. This ensures that the Indian government can collect the minimum tax on Indian-sourced income before it is remitted to a foreign jurisdiction where the government has no meaningful ability to enforce compliance.
Indian tax law allows a non-resident to be subject to either the provisions of domestic law or an income tax treaty, whichever is more beneficial regarding the applicability of WHT on income from India. If the domestic WHT rate is applicable, an additional surcharge and Health & Education Cess (HEC) will also apply.
A comparative summary of applicable WHT tax rates under the Income Tax Act and India-U.S. tax treaty is outlined below, not including the additional surcharge and HEC:
| Nature of payment | WHT rate under the Income Tax Act (%) | WHT rate under India-U.S. tax treaty (%) |
| Dividend | 20% |
Default rate is 25% 15% if at least 10% of the voting stock is owned by a corporation |
| Interest |
Rates are from 5% to 30% for non-corporate borrowers and 5% for corporate borrowers. 20% for loans in foreign currency |
Default rate is 15%, with 10% withholding if the borrower is a bona fide bank or financial institution, including an insurance company. |
| Royalty | 20% | Default rate of 15%; 10% rate for equipment rental and fees for services ancillary to equipment rental |
| Fees for technical / Included services | 20% | Default rate of 15%; 10% for payments for the right to use industrial, commercial or scientific equipment, and for services ancillary to such fees |
In order to claim the tax treaty benefit of a lower WHT rate, a non-resident taxpayer must provide the following documents to the withholding agent in India:
- U.S. Form 6166, Certification of U.S. Tax Residency.
- A printed Form 10F from the ePortal submission, after the non-resident registers with the Indian tax authority through an electronic portal.
- A signed No Permanent Establishment (NO PE) Declaration.
A non-resident taxpayer must file an income tax return in India if they have earned Indian-sourced income during the Indian fiscal year, which runs from April 1 through March 31. However, as noted above, there is an exception to this requirement: if the non-resident has earned income from dividends, interest, royalties and fees for technical services, and tax has been withheld at the statutory domestic rate, they are not required to file a tax return in India. Nevertheless, if a non-resident taxpayer opts to avail themselves of the benefit of a lower withholding tax rate as per the India-U.S. income tax treaty, they will be required to file an income tax return in India.
In addition, a non-resident taxpayer that files an income tax return in India has additional related compliance obligations, including:
- Obtaining a Permanent Account Number (PAN) in India.
- Obtaining a digital signature of the authorized person for e-verification of the filed tax return (applicable in the case of corporations).
- Opening a bank account in India for claiming a tax refund.
The tax returns are due on July 31 of the following financial year for non-corporate taxpayers, Oct. 31 of the following financial year for corporate taxpayers and Nov. 30 of the following financial year for transfer pricing cases.
It is recommended to discuss with the Indian withholding agent/payor how they intend to classify the payment and the relevant withholding tax rate they plan on applying. This ensures that both sides are aligned with respect to the nature of payment and the relevant WHT rate. Also, it is recommended to provide the Indian payor with the relevant withholding tax documents prior to payment, thus avoiding a higher statutory WHT rate being applied and the subsequent need to claim a refund. The refund process can take a significant amount of time and can have a potential negative impact on cash flow until the refund is processed and paid.
A non-resident taxpayer may file an income tax return in India to claim a refund under the following situations:
- If the taxpayer paid a withholding tax when they were not required.
- The withholding tax rate was applied incorrectly.
- Withholding occurred at a higher domestic rate, when the lower treaty tax rate was not available at the time of withholding due to lack of appropriate documentation.
In the last situation, the refund is filed for the difference between the higher domestic rate and the tax treaty rate. Obtaining a refund can take anywhere from six to twelve months, and potentially longer if the refund claim is incomplete, subject to greater scrutiny or delayed due to a backlog in the tax department.
Conclusion
When conducting business with Indian customers, it is important to keep in mind the potential applicability of withholding tax and the related compliance requirements, especially when planning to claim the benefits of the income tax treaty between the U.S. and India.
The withholding tax compliance process in India may appear complex. However, understanding the required documentation, and planning ahead to obtain the relevant documents, especially the U.S. tax residency certificate, is crucial to utilize the tax treaty benefits. This will ensure that a U.S. business can receive payments from an Indian customer in a timely manner with the appropriate claim of tax treaty benefits, including a lower withholding tax rate, thereby ensuring that cash flow is not negatively impacted.