A US entity has a client in India. The US entity also have there own Private Limited set up in India (for Offshore services). The US entity wants to do business with a client in India. Could you please help us understand what the best approach would be:
What are the tax and other implication in both the approaches?
Hi Deepak,
Great question! Choosing between contracting directly via the US entity or through the Indian Private Limited (Indian subsidiary) has important tax and compliance implications. Here’s a clear comparison to help you decide:
Tax Implications:
Withholding Tax (TDS): Indian client will deduct TDS on payments to US entity (usually 10-15% as per India-US DTAA).
Permanent Establishment (PE) Risk: If US entity has a fixed place of business or dependent agents in India, it may create a PE in India and attract Indian corporate tax on profits attributable to that PE.
Indirect Taxes: No GST applicability on services directly provided by US entity outside India. But Indian client may need to pay GST under Reverse Charge Mechanism (RCM) on import of services.
Compliance: US entity must file Indian tax returns if it has PE or income deemed taxable in India.
Other Considerations:
Simpler from Indian regulatory compliance as no local entity involved.
Currency exchange and repatriation might be simpler.
Contract enforcement could be harder if dispute arises, depending on jurisdiction.
Tax Implications:
Indian entity will pay corporate tax on its global income (normal Indian tax rates).
Client pays without TDS on cross-border payment (since both are Indian entities).
Indian entity must comply with GST on services provided to the Indian client.
No PE issues for US entity, as Indian entity is local taxpayer.
Indian entity can claim input tax credit on GST paid.
Other Considerations:
Indian entity requires compliance with Companies Act, RBI regulations, and regular filing.
Easier business relations for Indian client as contracts with local entity.
Allows better control over operations, invoicing, and tax planning within India.
Repatriation of profits from India to US entity involves dividend distribution tax (or other applicable taxes), plus compliance with FEMA regulations.
| Factor | Contract with US Entity | Contract with Indian Entity (Pvt Ltd) |
|---|---|---|
| Tax Residency | US entity; possible Indian PE risk | Indian resident entity |
| Corporate Tax | Only if PE in India; else tax treaty applies | Full Indian tax on profits |
| TDS | Deducted by client on payment to US entity | No cross-border TDS |
| GST | RCM applicable on Indian client | GST charged by Indian entity |
| Compliance | Less Indian compliance if no PE | Full Indian company compliances |
| Control & Management | Limited operational control in India | Full control over local operations |
If US entity has minimal physical presence in India, and wants to avoid Indian compliance burden, direct contract with US entity is simpler but watch out for PE risk.
For long-term operations, better client relationships, and full compliance, contract through Indian Pvt Ltd is preferable despite higher compliance.
Tax planning can be optimized with transfer pricing policies if Indian entity provides services to US entity or vice versa.
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