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Cross Border transactions-Withholding tax obligations on payment to Non-residents

In the advent of global trade large number of cross border transactions are taking place in India and a huge amount of payments are being made to non-residents. Tax on Income earned by non-residents from such transactions which is chargeable to tax in India as per the provision of the Income Tax Act is the subject matter of discussion in this paper.

In India the tax on Income is chargeable in the hands of Non-Residents if such Income is:

  1. received or deemed to be received in India in the Previous Year by him or on his behalf; or
  2. accrues or arises or is deemed to accrue or arise to him in India during the Previous Year.

Here the key word here is ‘deemed to accrue or arise to him in India’ which is the unique proposition unlike the other tax jurisdictions. Normally, in almost all tax jurisdictions non-residents are taxed on the Income which is source in that jurisdiction. Now the question arises, how the income source is defined. For that long ago, a concept of business connection (permanent establishments or physical presence) evolve by which non-residents are taxable only if their income relates to their business connection in source jurisdiction. Based on the above principle of business connection, the business income of the non-residents are deemed to be taxed in India only to the extent as is reasonably attributable to the   operations carried out in India.

Recently the concept of business connections has under gone a sea change due to new age business models based on technology where physical presence is not at all required to do business in any tax jurisdictions, therefore, India has also added in the definition of business connection the concept of ‘Significant Economic Presence’ SEP to target business income of Non-residents through digital mode.

Other than business Income, following are certain other type of Income derived by Non-residents from India are deemed to be chargeable to tax in India irrespective for the fact whether or not,  the non-residents has a residence or place of business or business connection in India or non-resident has rendered services in India:

  1. Salary income of non-residents if services are rendered in India or salaries payable by the Government to a Citizen of India for services rendered outside India.
  2. Dividend Income paid by an Indian Company outside India to a non-resident.
  3. Interest payable by Government; or payable by person who is resident (except where it is for the use for his business/profession outside India or used for making or earning any income from any source outside India; or payable by non-resident used for his business/profession in India.
  4. Royalty (including any lump sum consideration but excluding consideration which would be the income of the non-residents chargeable as Capital Gain) payable by Government; or payable by person who is resident (except where it is for the use for his business/profession outside India or used for making or earning any income from any source outside India; or payable by non-resident used for his business/profession in India.
  5. Fee for technical services payable by Government; or payable by person who is resident (except where it is for the use for his business/profession outside India or used for making or earning any income from any source outside India; or payable by non-resident used for his business/profession in India.
  6. Any sum (As mention of S-56(2)(x) of ITA payable by person who is resident to non-resident.

Therefore, determination of tax ability of Indian source Income in the hands of non-residents under the Income Tax Act is the first step towards withholding tax obligations of the payer.

In the Next part of this paper, we shall discuss the determination of tax ability of Indian source Income in the hands of non-residents under Double Taxation Avoidance Agreement.

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