Receiving income in India? Watch out for withholding tax implications
With businesses going global, it is common for foreign nationals to expand their horizons by providing professional services outside their home country. Also, various multinationals depute their workforce across jurisdictions. With such individuals rendering services or moving from one country to another, there are significant tax outflows in the host country. Therefore, it is important to understand the scope of taxation on the income earned and the corresponding withholding tax implications.
The scope of taxation in India depends upon the residential status of a taxpayer. The residential status of an individual in a particular tax year is determined by the physical presence of that individual in India. As per Indian tax laws, an individual would be a resident in a tax year if he is present in India for a period of 182 days or more in a particular tax year or is present in India for a period of 60 days or more during the relevant tax year and 365 days or more during the preceding four tax years. In any other case, such individual would be regarded as a ‘non-resident’ for tax purposes.
While residents are taxed on their global income, non-residents are taxed only on income that is received or deemed to be received in India or, income that accrues/arises or is deemed to accrue/arise in India.
Based on the residential status of an individual, the withholding tax implications may vary. Some of the prominent streams of income of non-resident individuals in India are analysed here from a withholding tax perspective:
Income from salaries:
India follows a ‘pay-as-you-earn’ (PAYE) system of taxation for income from salaries. Salary received by a non-resident is taxable to the extent it relates to exercising of his/her employment in India. At the time of salary credit, the employer is obligated to withhold taxes at progressive rates.
Foreign nationals coming to India for a short-term assignment can claim exemption from being taxed in India if their stay in India does not exceed 90 days. However, to claim such exemption, the foreign nationals should remain on the payroll of a foreign employer; the foreign employer should not engage in any trade or business in India and cannot claim such salary expense as a deductible expenditure.
The India–Singapore Treaty under Article 15—Dependent Personal Services, also provides a similar beneficial provision; however, the number of days spent in India is relaxed to 183 days. To claim such beneficial provision, the remuneration should be paid by the foreign employer and not by its fixed base or a permanent establishment in India.
In relation to the rendering of technical and professional services in India, the fee received is taxable in India and would suffer withholding at the rate of 10% (plus applicable surcharge and cess). As per the beneficial provisions of the Treaty, unless and until the non-resident makes available technical knowledge, experience and transfers technical plans or technical designs, such fees may not be regarded as fee for technical services (under the treaty provisions) and consequentially, there is no requirement of withholding tax. Further, as per provisions of the treaty, income of individual professionals viz., teacher, doctor, engineer, etc., shall be exempt in India unless the professional has a fixed base, regularly available in India or their stay in India exceeds 90 days in the tax year.
Income from sale of shares
A non-resident would be subject to tax on capital gains arising from transfer of shares of an Indian firm. On sale of such assets, any gain/loss arising on shares held for less than 12 months is treated as short-term capital gains and taxed at 15% in the hands of the transferor. In other cases, the gain/loss is regarded as long-term capital gains and taxed at 10% (plus applicable surcharge and education cess). However, long-term capital gain on listed shares, where a securities transaction tax is applicable, are exempt from tax subject to fulfilment of certain conditions.
Earlier, the treaty provided tax exemption from sale of shares held in India. Effective 1 April 2017 up to 31 March 2019, tax on any gain arising from sale of shares shall be restricted to 50% of the prevailing tax rate.
In order to calculate capital gain/loss, purchase cost of the shares, any expenses directly related to the transfer of such shares (example: brokerage expenses) is reduced from the sale consideration of the asset.
On the gain so earned by the transferor, the transferee is required to withhold taxes, at rates as discussed above.
In relation to rental income, the tenant of the property is required to withhold taxes at 30% (plus applicable surcharge and cess), on lease rentals paid, after a standard deduction of 30% (of the annual value of the property), property taxes (actually paid) and mortgage interest payable during the tax year.
Interest from securities, commission, etc., earned by an individual would be subject to withholding taxes in India. In case of dividend income earned, the same would be exempt if the Indian firm has discharged a dividend distribution tax. While foreign nationals cannot escape the rigors of withholding tax provisions (on various incomes earned in India), it is pertinent to highlight the importance of claiming the beneficial provisions of the treaty with regards to exemptions, lower withholding tax rates, etc. Further, such individuals can also claim credit of taxes paid in India, as per the provisions of the tax laws of the home country.
1. What if I don’t have a Permanent Account Number (PAN) in India?
PAN is a tax identification number of a taxpayer. In case a taxpayer does not possess PAN in India, he/she shall be subject to withholding of taxes at a higher rate of 20%, or rates as specified under the Income-tax Act, 1961, or the rates in force. The provision is relaxed if a taxpayer provides certain details, such as a tax residency certificate (TRC), a tax identification number (TIN), personal contact details, etc.
2. Are there any obligations at the time of withholding by the payee?
Withholding of taxes is an obligation of the payer. The payee, however, needs to provide appropriate PAN, TRC, TIN, personal details, etc., to avoid withholding at a higher rate.
3. Can an individual claim foreign tax credit (FTC)?
Singapore-resident taxpayers would be able to claim a credit from taxes already withheld in India, subject to the provisions of the local tax laws in Singapore.
Girish Varandani contributed to the article.
Vikas Vasal is national leader tax-Grant Thornton India LLP.
Respond to this article at email@example.com