Budget 2010 has shut the window for non-resident service providers like technical or financial consultants, or certain other foreign service providers, to save taxes for rendering services to Indian businesses.
This relates to the amendment of the source rule in Section 9 (clause v, vi, vii) of the Income Tax Act on the income from interest, royalty and fees for technical services rendered by non-resident service providers, in India or abroad, for Indian businesses.
The finance bill has clarified such services rendered by a non-resident will attract the withholding tax of 10.56 per cent, irrespective of whether the services were rendered in India or abroad, if it was paid by or availed for a business in India.
The amendment comes into effect retrospectively, from June 1, 1976, and overrules a Supreme Court judgment in 2007, which said non-residents have to pay a tax only if they physically rendered the service in India, and not otherwise.
What the new rule says is that irrespective of where the service was rendered, the service provider will be liable to pay tax in India if its services were paid or availed by an Indian entity or were used to carry out business in India or earning an income in India.
In 1976, the government had mandated that all such income for services rendered by non-residents will be liable to be taxed in India, irrespective of whether these services were rendered in India or abroad, if the services were paid or availed by an Indian firm.
However, the Supreme Court, in a case of Ishikawajima-Harima Heavy Industries Vs Directorate of International Tax, held that for such services to be taxed, it must be rendered in India, as well as utilised in India. What it meant was that if the service was being rendered out of say, New York, it couldn’t be taxed in India.
"People were trying to use the window (created by the apex court judgment) to avoid the tax. The clarification effectively closes this window," said Anurag Jain, partner (direct tax), BMR Advisors. A non-resident using the services of a non-resident will have to deduct a tax, if the same is paid for by a business in India, or is meant for earning income here.
"The problem with amendments like this is that many of these are with retrospective effect and overrule court rulings. The taxpayers become liable to pay tax with retrospective effect, which creates uncertainty (in business circles)," said Sunil Badala, partner, B S R & Co.