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Tax on services delivered in India

 

An India-based customer of an internet services company (services are not provided within India, but by datacenters throughout the world) is claiming that they must withhold 15 % of our fee to pay to the Indian govt.  Here's the customer's explanation:

"As per Indian/US law, if you receive any service and remit the amount outside territory of India/US, you need to deduct Withholding Tax, and your presence is not required within territory (Please cross check US/India law).  As per Income Tax Act, Taxes are not on us but on the service provider.  All service provider are required to pay taxes if they generate revenue from India."

We had a similar question come up with a customer in Greece, and got around it by requesting a Form 8802 from the IRS that refers to the US/Greece treaty, and I don't think there's been an issue. 

Has anyone had any experience with this type of international tax situation?  We are not interested in registering in India since we have no physical presence nor employees.  

Thanks for any tips or resources.

 

Paul

Answers

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Paul
I would ask the customer to validate their explanation by proving you with the specific code/section of the Indian law that applies, and then explore your options. There may be mis-interpretation.
Further, if there is such a provision, look for your client's rights to get proof of payment of the withholding tax as it may be required for US tax offset/relief.
And finally, examine your agreements to look for ways to protect margins/gross revenues, by explicitly addressing impact os such taxes.
Looks like specialist tax advice would be needed if the issue is material.
Regards
Len

Amandeep Saini CPA
Title: ATR MCC Operations Manager
Company: Maersk Global Service Centres
LinkedIn Profile
(ATR MCC Operations Manager, Maersk Global Service Centres) |

Paul,

Can you provide more details of services Indian Customer is availing ? I will check and get back to you.

Regards,

Amandeep Singh, CPA

Paul Shapiro
Title: Startup CFO Consultant
Company: Paul G. Shapiro, CPA
(Startup CFO Consultant, Paul G. Shapiro, CPA) |

It is basically internet streaming services,delivered from servers around the world, none of which are based in India

Tom Dubnicka
Title: President
Company: Dryden Business Advisory
(President, Dryden Business Advisory) |

We had a similar issue with two companies in India in that they wanted to withhold taxes. They worked with us to identify a process to avoid this that is similar to the process to avoid backup withholding in the U.S. See this document at this link: http://law.incometaxindia.gov.in/Directtaxlaws/cbdt/dta/A1_USA.htm

There is an agreement between India and the US to avoid this - India – United States of America Double Taxes Avoidance Agreement (DTAA)

The solution was slightly different for each. We sent the company a declaration we had no operations in India; a statement that our company was a tax resident of the USA; and then what was called an "Annexure document" that contained a statement like this:

We, xxxxx, permanent resident (not for profit corporation) of the United States of America hereby declare that we are a tax resident of the United States of America and our global income is subject to tax in the United States of America and accordingly we are subject to the provisions of India – United States of America Double Taxes Avoidance Agreement (DTAA).
I confirm that we do not having any fixed base/permanent establishment in India and accordingly we are not covered under any of the limbs of Article 5 of the aforementioned DTAA.

Paul Shapiro
Title: Startup CFO Consultant
Company: Paul G. Shapiro, CPA
(Startup CFO Consultant, Paul G. Shapiro, CPA) |

Thanks Tom, that's a very useful and helpful answer. I'll look into the link you referenced.

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