LIVE GST Certification Course by CA Arun Chhajer begins 27th April. Register Now!!

Withholding tax and service tax

Barun Maskara (Service) (41 Points)

27 August 2011

Dear All,

This is urgent. Our Company has import some services from China worth $10,000. This service is liable to both Service Tax and Withhlding Tax @ 10%. But I am not able to understand how do I calculate the amount to be charged towards Service Tax and Withholding Tax.

Can any of my friend guide me in this regard?

Reply
Follow
Share

5 Replies

Siddarth R Sunder Ram (Finance Professional) (230 Points)
Replied 27 August 2011

There are two parts to this question, to which I am answering you as below:

1. Service tax: Under the service tax laws, in case of import of service, the service recipient (in this case your company) is liable to pay service tax @ 10.3% on $ 10,000 (converted at an appropriate exchange rate). This is popularly known as the Reverse Charge Mechanism.

2. TDS: In this case, I am assuming that the Chinese service provider will still want $ 10,000 since he will not be concerned about Indian tax laws about TDS deduction. In such a case, Section 195A of the Income Tax Act will apply, wherein the sum of $10,000 will have to be grossed up to include TDS portion and then TDS deducted, so that the net figure remains $10,000. That is to say, $10,000 / (1 - 0.1) = $10,000/0.9 = $11,111.11 on which TDS is deducted @ 10% to get back the net amount of $10,000.

Hope this clarifies the position.

Kiran Kumar V (C.A. Final) (181 Points)
Replied 28 August 2011

Dear friend,

Siddarth is correct in respect of Service Tax.

As far as TDS U/s 195A is concerned . You have to examine,

Whether the chinese company has Permanent Establishment in india?

If yes, you have to deduct tax at source.

If my answer is wrong correct me.

Regards,

Kiran Kumar V

Siddarth R Sunder Ram (Finance Professional) (230 Points)
Replied 28 August 2011

Well, Section 195 says

"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest ⁷⁴[***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” ⁷⁵[***]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.."

Looking at this section, it appears that tax is deductible only on income chargeable to tax in India which is paid to a non resident. If a non resident's income has to be taxed in India, then the income should either be received / deemed to be received in India/ accrue / deemed to accrue in India. So you have to determine if there is TDS accordingly.

Either case, the Chinese supplier gets $10,000, whether or not you deduct TDS..

Vineet (Vice President) (21 Points)
Replied 14 September 2011

Depending upon the nature of service, the payment is taxable in India as Fee for Technical Service under Article 12 of Indo-China DTAA @ 10%. You have to also check availability of PAN of non resident, otherwise provisions of section 206AA are applicable and WHT rate will be 20%. Of course your Chinese counterpart will require payment net of tax, hence you will have to gross up.

Mr Sidarth, your judgement is correct but logic is wrong. The payment to non resident is taxable in India by virtue of deeming provisions of section 9, whereby even service provided outside India for a business is India is deemed to income accrue or arise in India. Then one has to look at treaty provisions which are overriding the Act, and examine the taxability of payment in India. The same sum paid to chinese may be taxable in India whereas it may not be a case where payee is US tax resident. Further in treaty governed cases tax rate is determined by treaty and not doemsic law. u/s 115A the rate of tax for fee for technical service is 10.5575% 9which include surcharge and cess) whereas under treaty it is 10%.

Madhukar N Hiregange (Chartered Accountant) (38934 Points)
Replied 15 September 2011

Rule 7(1) of the ST Valuation rules sets out that the value shallbe the actaul amount charged for the services. Therefore the grossed up WT need not be added up. Only on 10k $