India

There is an obligation on the payer (either resident or non-resident) of income to withhold tax when certain specified payments are credited and/or paid. Some of the expenses that require WHT are as follows.

Payments to resident companies

Notes

1. Payments have different threshold limits. The payer is only required to withhold tax if the total payment within a tax year to a single person (except where specified otherwise) is above the limits specified above.
2. The threshold limit for WHT for non-specified type of interest is INR 5,000, except in the case of interest received from a bank or deposit with post office, for which it is INR 10,000. This threshold limit is increased to INR 50,000 in case of interest provided by a co-operative society, and INR 40,000 if recipient of interest is a senior citizen (i.e. age of more than 60 years).
3. Where the cash has been withdrawn by any person who has not filed return of income for three immediately preceding financial years, the threshold of INR 10 million will be read as INR 2 million and tax will be deducted at 2% on amount exceeding INR 2 million but not exceeding INR 10 million and 5% on amount above INR 10 million.
4. The definition of ‘royalty’ also includes consideration for use of, or right to use, computer software. Transfer of all or any rights in respect of any right, property, or information includes transfer of all or any right to use computer software (including granting of a licence), irrespective of the medium through which such a right is transferred and irrespective of whether any right or property is located in India. 
5. Tax at 2% is to be withheld in case the company is engaged in business of operation of call centres.
6. Finance Act, 2024 has amended the rate to 2% with effect from 1 October 2024.
7. Finance Act, 2024 has amended the rate to 0.1% with effect from 1 October 2024.

Important point for consideration:

Finance Act, 2021 has prescribed a levy of higher tax deducted at source (TDS) and tax collected at source (TCS) on non-filers of income tax returns. Accordingly, higher TDS will be applicable to those having interest income, dividend income, annuity pensions, and income from capital gains. However, this higher TDS will only apply to a specified category of non-filers of returns. Further, this new section shall not apply where the tax is required to be deducted in case of salaries, provident fund, winning from lottery, winning from horse rates, income received from a securitisation trust, or cash withdrawal exceeding INR 2 million. As per the provisions under the Indian Income-tax Act, the higher TDS rate applied will be the higher of:

• twice the rate specified in the relevant provision of the Indian Income-tax Act
• twice the rate or rates in force, or
• the rate of 5%.

Application for permanent account number (PAN)

Every person (not being an individual) who enters into a financial transaction of an amount aggregating to INR 250,000 or more will be required to apply to a tax officer for a PAN.

If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Income-tax Act, the rates in force, or the rate of 20%, whichever is higher.

Payments to non-resident companies

Notes

• Percentage to be increased by a surcharge and health and education cess to compute the effective rate of tax withholding.
• Income from units of specified mutual funds received on or after 1 April 2020 is now taxable in the hands of the unitholders.
• Dividends received from Indian companies prior to 1 April 2020 are tax-free in the hands of the shareholder. Any dividends received post 1 April 2020 are chargeable in the hands of the non-resident shareholder at the rate of 20% or treaty rate, whichever is beneficial.
• Short-term capital gains on transfer of shares of a company or units of an equity-oriented fund would be taxable at 15% if they have been subjected to STT.
• There is no threshold for payment to non-resident companies up to which no tax is required to be withheld.
• If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Act, the rates in force, or the rate of 20%, whichever is higher. The government has notified rules that do not mandate quoting of PAN, subject to certain conditions.
• The payer is obligated to report specific information in the prescribed form (whether or not such payment is chargeable to tax).
• Where taxes are withheld as per the rates provided above with respect to dividend, interest, royalty, or FTS and there is no other income chargeable to tax in the hands of the non-resident, then compliance obligations relating to filing of return of income by such non-resident in India are not required.

Tax deducted at source (TDS) on purchase of goods

The Finance Act, 2021 has introduced the provisions related to TDS on purchase of goods, which is applicable from 1 July 2021. The salient features are the following:

• Applicable on purchases made in excess of INR 5 million.
• Applicable on buyers whose total sales, gross receipts, or turnover from the business exceed INR 100 million during the immediately preceding financial year.
• Tax is required to be deducted at 0.1%.
• TDS on purchase of goods is not applicable in the following cases:
  • Taxes are to be withheld under other provisions of the Income-tax Act.
  • TCS on sale of goods is applicable.

Finance Act, 2024 has amended the provisions to include the scope of nil or lower WHT certificate for TDS on purchase of goods.

Tax collected at source (TCS) on sale of goods

The Finance Act, 2020 has introduced provisions for TCS on sale of goods at the rate of 0.1% on transactions for sale of goods exceeding INR 5 million effective from 1 October 2020. These provisions are applicable only if the turnover/gross receipts of the seller in the immediately preceding year do not exceed INR 100 million. Further, where PAN/Aadhar is not provided by buyer, tax will be collected at the rate of 1%. This provision will not apply where the seller exports goods out of India or the buyer is importing goods into India or the said transaction is already covered under any other provision of tax laws.

TCS on Liberalised Remittance Scheme (LRS) and on purchase of overseas tour program package

The Finance Act, 2024 has amended the provisions whereby the rate at which tax is required to be collected on the following was reduced from 20% to 5%:

• Authorised dealer banks collecting funds to be remitted under LRS for the purpose of education or medical treatment.
• Seller of an overseas tour program package, where the amount received by the seller of an overseas tour program package does not exceed INR 700,000 in a tax year.

In any other situation covered under the provision, the TCS rate continues to be 20%, subject to certain exceptions.

Treaty rates

Some tax treaties provide for lower WHT rates from certain types of income, as follows:

Notes

1. The treaty tax rates on dividends are not relevant for dividends received up to 31 March 2020 since, under the earlier Indian tax legislation, most dividend income from Indian companies that is subject to DDT is exempt from income tax in the hands of the recipient. However, this scenario has changed since the DDT is abolished and tax is now levied in the hands of the recipient of dividend income with effect from 1 April 2020.
2. 10% for the use of or right to use any industrial, commercial, or scientific equipment; and in other cases:
   1. During the first five years of the agreement:
      • 15% if the payer is the government or specified organisation.
      • 20% in any other case.
   2. Subsequent years: 15% in all cases.
3. If at least 10% of capital is owned by the beneficial owner (company) of the company paying the dividend or interest.
4. In absence of specific provision, it may be treated as business profits or independent personal services under respective tax treaties, whichever is applicable.
5. The Ministry of Finance has issued a notification on 19 March 2024 permitting the benefit of MFN clause under the India-Spain tax treaty. The Indian government amended the India-Spain tax treaty by importing a lower tax rate of 10% for royalty and FTS from the India-Germany tax treaty. The lower tax rate shall be applicable from financial year 2023/24 corresponding to tax year 2024/25.
6. If royalty relates to copyrights of literary, artistic, or scientific work.
7. If at least 25% of capital is owned by the beneficial owner (company) of the company paying the dividend.
8. If at least 25% of capital is owned by the company during at least six months before date of payment.
9. If paid on a loan granted by a bank/financial institution.
10. The tax rate for royalties and FTS, under the domestic tax laws, is 20%. This rate is to be increased by a surcharge at 2%/5% on the income tax (based on taxable income) and health and education cess of 4% on the income tax including surcharge. Consequently, the effective tax rate is 20.8%/21.84%. This rate applies for payments made under an agreement entered into on or after 1 June 2005. Accordingly, a tax resident can either use the tax treaty rate or domestic tax rate, whichever is more beneficial.
11. If interest is received by a financial institution.
12. Taxable in the country of source as per domestic tax rates.
13. If royalty payments arise from the use or right to use trademarks.
14. Tax treaties of certain countries do not have a separate clause specifying the WHT rate for fees for technical services and fees for included services.
15. 5% if the beneficial owner is a company holding at least 10% of the share capital; 15% in other cases.
16. 15% of gross amount of dividend in case such dividend is paid out of income derived from immovable property and such income is exempt from tax. 10% in all other cases.
17. 10% if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company).
18. 10% if payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment and fee for included services that are ancillary and subsidiary to the enjoyment of the property for which payment is received.
19. Dividend/interest earned by the government and certain institutions, like the Reserve Bank of India, is exempt from taxation in the country of source.
20. If it is payable in pursuance of any collaboration agreement approved by the government of India.

India tax position on the Multilateral Instrument (MLI)

India signed the MLI in June 2017. The Indian Government approved the ratification of the MLI on 13 June 2019, and India deposited the ratification instrument along with its final MLI position on 25 June 2019. The date of entry into force for India is 1 October 2019, and the date of entry into effect for India is 1 April 2020. The following tax treaties have been amended to date pursuant to the effect of the MLI.