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Service Tax on Royalty Payments to Parent Company

Amit Tulsyan (Service) (165 Points)

08 November 2009

My Company which is a 100% subsidiary of a swiss company has to pay Royalty on the Gross sales (exports as well as domestic).

1.What is the Rate at which service tax shall be levied on the above and the relevant section applicable?

2.Will TDS be deduted,if yes under what section and at what rates and whether it should be deducted on Gross Amounts(Royalty+Service Tax)?

3.Is R&D cess applicable on the Royalty?If yes what shall be the Rate?whether abatement can be taken of the cess.

4.Can credit be taken of the Gross service tax paid on Royalty under the Cenvat Credit?

5.Does India have a DTAA with the Switzerland Govt.?

6.How will the above be affected if there is DTAA applicable with the Swiss Govt.?

7.Can the company pay Royalty "Net of Taxes"?If yes, then how should it be computed?

Please reply ASAP

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1 Replies

Sunil (Trader) (2611 Points)
Replied 08 November 2009

1) Rate is 10% + 3% cess.

2) TDS is on invoice amount. Royalty is also on the same amount. If you bear TDS from your pocket without deducting from party, then TDS is on grossed basis (20% TDS means you pay 25% if rom your own pocket). You will have to pay Service Tax on Royalty + TDS if you bear the TDS.

3) Edu Cess and Higher Edu Cess are the only cesses on Central Government Tax.

4) If your royalty qualifies for input service then only you can avail CENVAT Credit. Abatement is totally different.

5) Yes. There is a DTAA with Swiss Confederation since Dec 1994.

6) The DTAA Does not affect service tax as that liability is borne by the recepient of service on a reverse charge mechanism. However the taxation of Royalty is affected. According to Income Tax Act TDS on Royalty is 20% irrespective of whether payee has PE in India or not. According to DTAA, if the person (company) receiving Royalty is Swiss, India cannot charge more than 10% TDS. You have to deduct TDS at rates beneficial to Assessee. However, w.e.f from 1/10/2009the Swiss Individual or Entity will have to take a PAN number in India to take benifit of lower tax as per DTAA. You issue to them the Form 16A and they can take relief of the Swiss Taxation on the same income only that suffered tax in india. They cannot adjust the Indian Tax against any other tax on income accruing in Switzerland. If the Swiss Tax is more than what was suffered in india, they have to pay the difference to Swiss Government. If it is equal to or less, then they get no refund in Switzerland. You should give Form 16A immediately after you deposit the tax. the Fiscal years for tax filings are different everywhere. You should not wait until March 31 to issue certificate.

7) If you are paying tax even as per DTAA at 10% from your pocket, you will have to bear 12.5% if nett of taxes. However, you will need the PAN Number of payee otherwise you bear 25%.