India, as one of the world’s fastest growing economics, provides plenty of opportunity for British businesses to export their services. It is always necessary to consider local laws and tax rules when engaging with overseas customers, the earlier in the tender process the better. This short piece centres on the withholding (“WHT”) position.
With four different rates of WHT potentially applying, it is important to understand which rate will apply to the services being provided. Under the provisions of the UK-India tax treaty, if the UK service provider spends at least 90 days in India during the calendar year (29 days if services provided to an associated enterprise) then they will be treated as having a service permanent establishment (“PE”). This would mean that the Indian customer would deduct WHT at 40%. As the day count includes all days spent in India, e.g. including days spent on holiday by employees, the 90 day threshold could easily be breached.
The danger is that the UK business is not aware of the threshold until the services have been provided and payment is due. By this time it is too late to take any measures which may improve the position or at least enable the UK business to reflect the WHT within the tender price.
If the 90 day threshold is not breached, i.e. there is no service PE, then the default position is that the Indian customer is obligated to deduct WHT at a rate of 20%. Fortunately it is possible to reduce the rate to either 15% under the UK-India treaty or alternatively to just over 10% (vias the PAN process).
In reality the UK business sensibly should take steps which would mean it should benefit from the 10% rate. Having recently discussed the matter with a colleague at PKF-India, it is necessary for businesses providing services in India to file an annual income tax return. This requires obtaining a ‘permanent account number’ (PAN) with the Indian tax authority which is a key component to obtaining the 10% WHT rate.
By registering with the Indian tax authorities in good time, it ensures the minimum rate of WHT is applied. This improves the cashflow position of the UK business and mitigates the risk and cost of suffering irrecoverable WHT which would reduce the profit made from the contract.
The WHT position is complicated and I recommend that businesses providing services in India understand the position and take necessary steps to avoid any unexpected surprises.