Applicability of Indian withholding tax to Singapore and Hong Kong service companies

Jan 15

Applicability of Indian withholding tax to Singapore and Hong Kong service companies

Is a foreign company selling services subject to Indian withholding tax?

For a company in Singapore or Hong Kong selling services to an Indian client, an important question that affects your bottom line is whether such billing is subject to withholding tax in India.

The simple answer is no, provided that the following conditions are met:

Services are rendered entirely outside of the territory of India. An example is a management consulting company with its team entirely outside of India, and no part of the delivery happening within India. That the recipient of the services is indeed in India does not affect this.

The company providing the services is a resident of Singapore or Hong Kong. This can be established with a Certificate of Residence from IRAS in Singapore, or IRD in Hong Kong.

The company does not have any permanent presence in India. Permanent presence can be defined broadly as presence of an office or staff in India. Incidental business development trips to India will not establish permanent presence.

Once these three conditions are met, the income is not considered as generated in India, thus, under the territorial system of taxation, is not subject to Indian taxes. The question of withholding tax, which is simply a cautious method of collecting due taxes from a foreign entity, by making the local payer responsible, therefore does not arise.

The territorial basis of India’s Income Tax Act was called into question when a state high court (Karnataka) in CIT vs Samsung Electronics ruled to the contrary. However, the Supreme Court of India overturned this ruling, and reaffirmed India’s territorial system, as can be seen, among others, in the Vodafone vs Union of India ruling of 2012, in which:

Former Chief Justice of India Mr. S.H. Kapadia observed that ‘[…] in the case of a non-resident, unless the place of accrual of income is within India, [the assessee] cannot be subject to tax’.

Thus, the plain words of Section 195(1) of the Indian Income Tax Act, which in clear terms lay down that tax at source is deductible only from ‘sums chargeable’ under the Act, mean that withholding tax is not applicable when income is not generated in India.

Futurebooks provides corporate tax and structuring services for entities in Singapore.

This article is not to be construed as tax advice. In the interest of making this subject easily understandable concepts have been simplified, perhaps overly so. It is recommended that specific tax advice be taken from a professional firm before entering into a transaction.


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