Remittance of fees to foreign company
Querist : Anonymous
An Indian company has to make a payment to a foreign company in USA towards fee sharing for financial services rendered. The foreign company does not have a PAN card.
Please advise me wrt to withholding tax rate in the above case
Querist : Anonymous
Withholding Tax (TDS) on Fees to Foreign Company:
Nature of Payment:
Fees for financial services is considered a payment for "fees for technical services" (FTS) or "royalty/fees for technical services" under the Income Tax Act, depending on the exact nature of services.
Basic TDS Rate (without DTAA):
Under Section 195 of the Income Tax Act, the basic withholding tax rate on fees for technical services is 10% plus applicable surcharge and cess.
Double Tax Avoidance Agreement (DTAA):
India and USA have a DTAA that may provide for a reduced TDS rate on fees for technical services or may exempt it depending on treaty terms.
Under the India-USA DTAA, typically the rate is 10% or lower, but it depends on the specific treaty article.
PAN Card Requirement:
If the foreign company does not have a PAN, then TDS is deducted at the highest marginal rate (currently 20%) plus surcharge and cess, as per Section 206AA.
So, if PAN is not provided, TDS will be higher.
Summary:
Situation TDS Rate on Fees to Foreign Company (USA)
Foreign company has PAN DTAA rate (typically 10%) or Income Tax Act rate
Foreign company does not have PAN Highest marginal rate i.e., 20% + surcharge + cess
Suggestion:
Advise the foreign company to obtain a PAN or a Tax Residency Certificate (TRC) and submit it along with Form 10F to avail treaty benefits and reduce withholding tax.
Without PAN or TRC, higher TDS applies and refund can be complicated.
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