Column: Clearing the air on withholding tax

Mar 14 2014, 03:03 IST
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SummaryIn composite payments, tax will now be deducted only on the chargeable amount

Under the Indian tax laws, where a payment is being made to a non-resident and the same is taxable in India, the payer is required to withhold appropriate taxes. In case of non-compliance with this obligation, the payer is treated as “assessee-in-default” and is exposed to interest, penalty and prosecution (in specific circumstances).

Withholding tax is an effective and major revenue collection measure for tax authorities. The focus of tax authorities on withholding tax compliance and enforcement is ever increasing and there are many controversies on this subject.

In a situation where the payer is of the view that only a part of the entire amount (payable to non-resident) is chargeable to tax, such a payer may make an application to the tax authority to determine such sum (which is chargeable to tax).

There have been controversies in the past on: (1) whether withholding obligation and the need to approach the tax authority is still triggered if the payments is not chargeable to tax at all, and (2) whether with regard to the transactions (such as those resulting in capital gains or trading receipts) where only a part of total payment represents taxable gain, withholding is required with respect to the gross amount or only the taxable gain portion.

Views of judiciary

In the case of Samsung Electronics and others, the Karnataka High Court took a view that any remittance made to a non-resident would be subject to withholding tax, regardless of its chargeability to tax in India. A relaxation from this requirement is possible only where specific application is made to the tax authority for determination of tax to be withheld and such tax authority confirms no tax withholding. This judgment had created a large controversy, as it meant that practically for all foreign remittances from India, application for tax withholding needs to be made.

Subsequently, the Supreme Court, in a landmark ruling in the case of GE India Technology, held that withholding tax obligation would apply only if the payments are chargeable to tax in India. Whereas, in respect of composite payments, tax is be deducted only in respect of the appropriate portion which represents the chargeable amount. The Supreme Court also held that if the payer is fairly certain, then the payer can make its own determination of the chargeable amount and restrict its tax withholding obligation to such an amount. Thus, the Samsung ruling was set aside by the Court.

Incidentally, without noticing

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