Service tax on contract with foreign co.
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 April 2014
Our company is entering a contract with a foreign company for establishing a manufacture facility for producing some parts used in automobile.
In connection to this, we have to take some service from them during the process of establishment like training, documentation, manuals, license and some guidance.
In contract, they defined the value activity wise and they are not accepting to deduct TDS on the remittances.
So my question is, whether all the following taxes are applicable in india while making above payment:
1.) TDS
2.) DTAA
3.) Service Tax
4.) Research & Development Cess
You are requested to please give the details of taxes applicable with rates and due dates.
In connection to this, we have to take some service from them during the process of establishment like training, documentation, manuals, license and some guidance.
In contract, they defined the value activity wise and they are not accepting to deduct TDS on the remittances.
So my question is, whether all the following taxes are applicable in india while making above payment:
1.) TDS
2.) DTAA
3.) Service Tax
4.) Research & Development Cess
You are requested to please give the details of taxes applicable with rates and due dates.
24 April 2014
Dear Anonymous,
Answer shall depend on the type of agreement, the country to which payment is being made and lot of other factors.
Anuj
femaquery@gmail.com
Answer shall depend on the type of agreement, the country to which payment is being made and lot of other factors.
Anuj
femaquery@gmail.com
Querist : Anonymous
Querist :
Anonymous
(Querist)
24 April 2014
Sir,
My Self Durga Prasad, I would to add further information for your advice.
The agreement is with south africa for establishing manufacturing facility.
My Self Durga Prasad, I would to add further information for your advice.
The agreement is with south africa for establishing manufacturing facility.
24 July 2025
Thanks for the additional info about the foreign company from South Africa and the nature of services (training, documentation, manuals, license, guidance) related to setting up a manufacturing facility.
Here’s a detailed view on **taxes applicable in India** on payments made to the foreign company:
---
### 1. **TDS (Tax Deducted at Source)**
* **Applicability:**
Payments to a non-resident for technical services, royalty, or fees for professional services are subject to TDS under Indian Income Tax Act (Section 195).
* **Whether applicable?**
Yes, if the payment qualifies as royalties, fees for technical services, or other taxable services under Indian tax laws.
* **Rate:**
Depends on the India-South Africa Double Taxation Avoidance Agreement (DTAA). Generally, the TDS rate is lower than domestic rates as per DTAA.
* **If the foreign company refuses TDS deduction:**
The payer (your company) is still **liable to deduct TDS** and deposit with Indian tax authorities. Failure to deduct TDS results in the payer being liable to pay the tax with interest and penalty.
---
### 2. **DTAA (Double Taxation Avoidance Agreement)**
* **Purpose:**
To avoid double taxation on the same income in both countries.
* **Implications:**
Check India-South Africa DTAA for reduced withholding tax rates on royalties, technical fees, etc.
* **Benefit:**
You may deduct tax at the DTAA rate instead of domestic rate, but you still **must deduct TDS**.
---
### 3. **Service Tax**
* **Applicability:**
Prior to GST (before July 2017), Service Tax was payable on "import of services" by way of reverse charge.
* **Whether applicable?**
Yes, on services received from outside India (training, documentation, license, guidance), you are liable to pay service tax on reverse charge basis (RCM).
* **Rate:**
Service Tax rate was 14% + 0.5% education cess (total 14.5%) or later 15% including Krishi Kalyan Cess.
* **Due date:**
Service tax under reverse charge is payable by 6th of the next month after receipt of services.
* **Note:**
Input credit on such service tax was generally available if used for business purposes.
---
### 4. **Research & Development Cess**
* **Applicability:**
R\&D Cess was levied on imports and certain domestic goods, but **not applicable** on service imports or payments to foreign companies.
* **Conclusion:**
**No R\&D cess on such service payments.**
---
### **Summary Table:**
| Tax | Applicability | Rate/Details | Due Date/Remarks |
| --------------------- | ------------------------------ | ------------------------------ | ----------------------------------- |
| **TDS** | Yes, on payment to foreign co. | As per DTAA (typically 10-15%) | At time of payment/remittance |
| **DTAA** | Yes | Reduces withholding tax rate | Ensure documentation for DTAA claim |
| **Service Tax (RCM)** | Yes, on import of services | 14%-15% (pre-GST) | By 6th of next month |
| **R\&D Cess** | No | N/A | N/A |
---
### **Recommendations:**
* **TDS:** Deduct as per Indian tax laws and DTAA. Even if foreign company objects, your liability remains.
* **Service Tax:** Pay under reverse charge on imported services.
* **Maintain documentation** to support claims under DTAA.
* **Consult a tax professional** for structuring payments and compliances.
---
If you want, I can help draft a checklist or provide references to notifications/circulars related to these taxes. Would you like that?
Here’s a detailed view on **taxes applicable in India** on payments made to the foreign company:
---
### 1. **TDS (Tax Deducted at Source)**
* **Applicability:**
Payments to a non-resident for technical services, royalty, or fees for professional services are subject to TDS under Indian Income Tax Act (Section 195).
* **Whether applicable?**
Yes, if the payment qualifies as royalties, fees for technical services, or other taxable services under Indian tax laws.
* **Rate:**
Depends on the India-South Africa Double Taxation Avoidance Agreement (DTAA). Generally, the TDS rate is lower than domestic rates as per DTAA.
* **If the foreign company refuses TDS deduction:**
The payer (your company) is still **liable to deduct TDS** and deposit with Indian tax authorities. Failure to deduct TDS results in the payer being liable to pay the tax with interest and penalty.
---
### 2. **DTAA (Double Taxation Avoidance Agreement)**
* **Purpose:**
To avoid double taxation on the same income in both countries.
* **Implications:**
Check India-South Africa DTAA for reduced withholding tax rates on royalties, technical fees, etc.
* **Benefit:**
You may deduct tax at the DTAA rate instead of domestic rate, but you still **must deduct TDS**.
---
### 3. **Service Tax**
* **Applicability:**
Prior to GST (before July 2017), Service Tax was payable on "import of services" by way of reverse charge.
* **Whether applicable?**
Yes, on services received from outside India (training, documentation, license, guidance), you are liable to pay service tax on reverse charge basis (RCM).
* **Rate:**
Service Tax rate was 14% + 0.5% education cess (total 14.5%) or later 15% including Krishi Kalyan Cess.
* **Due date:**
Service tax under reverse charge is payable by 6th of the next month after receipt of services.
* **Note:**
Input credit on such service tax was generally available if used for business purposes.
---
### 4. **Research & Development Cess**
* **Applicability:**
R\&D Cess was levied on imports and certain domestic goods, but **not applicable** on service imports or payments to foreign companies.
* **Conclusion:**
**No R\&D cess on such service payments.**
---
### **Summary Table:**
| Tax | Applicability | Rate/Details | Due Date/Remarks |
| --------------------- | ------------------------------ | ------------------------------ | ----------------------------------- |
| **TDS** | Yes, on payment to foreign co. | As per DTAA (typically 10-15%) | At time of payment/remittance |
| **DTAA** | Yes | Reduces withholding tax rate | Ensure documentation for DTAA claim |
| **Service Tax (RCM)** | Yes, on import of services | 14%-15% (pre-GST) | By 6th of next month |
| **R\&D Cess** | No | N/A | N/A |
---
### **Recommendations:**
* **TDS:** Deduct as per Indian tax laws and DTAA. Even if foreign company objects, your liability remains.
* **Service Tax:** Pay under reverse charge on imported services.
* **Maintain documentation** to support claims under DTAA.
* **Consult a tax professional** for structuring payments and compliances.
---
If you want, I can help draft a checklist or provide references to notifications/circulars related to these taxes. Would you like that?
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