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  1. Home
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  3. India Withholding Taxes

India Withholding Taxes

Posted by Sue Tuson on April 26, 2016

Sue Tuson Sue Tuson

US companies doing business with Indian entities may be subject to withholding taxes at the time the customer makes the payment. Generally, withholding occurs on payments for royalties or services, but can also be on other types of payments.

Withholding taxes can be in excess of 40% of the gross payment, so it is crucial to understand potential withholding liabilities in advance of negotiating contracts. In addition, it is also important to understand the documentation requirements necessary to get paid.

In many cases the US business will be required to get a Permanent Account Number (“PAN”), which is issued by the Indian Income Tax Department. The PAN is then provided to the Indian payee so payment can be made. Understanding these issues in advance will help minimize delays in receiving payments.

Many times reduced withholding rates can be obtained under the US Income Tax Treaty with India. This process generally involves making a treaty based position claim in the format required by the Indian government. This process can take an extended period of time depending on the type of claim being requested. As a result, payments may have to be delayed in order to get the proper documentation necessary for the reduced withholding. Alternatively, taxes that are over-withheld may take several years to recover or never be recovered. While most withholding taxes would qualify as foreign tax credit against US tax liabilities, the formula for taking the credit is limited based on net foreign source income where tax is being withheld on gross income, which can result in an excess credit position.

To best manage this situation, it is recommended that US businesses:

  • Communicate with their India-based customers to understand, in advance, what taxes may be withheld from payments.
  • Consider whether pricing or contracts need to be adjusted to address withholding.
  • Speak with their tax advisors to determine if withholding rates can be reduced and the process for obtaining the reduction.
  • Coordinate the timing of payments with the customer so the proper documentation can be obtained before withholding occurs.

Our team is always ready to help.

Please contact us for more information.

Sue Tuson

Sue Tuson

Shareholder, International Tax

Contact Sue   |   Read Sue's bio

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India Withholding Taxes

Posted by Sue Tuson on April 26, 2016

Sue Tuson

US companies doing business with Indian entities may be subject to withholding taxes at the time the customer makes the payment. Generally, withholding occurs on payments for royalties or services, but can also be on other types of payments.

Withholding taxes can be in excess of 40% of the gross payment, so it is crucial to understand potential withholding liabilities in advance of negotiating contracts. In addition, it is also important to understand the documentation requirements necessary to get paid.

In many cases the US business will be required to get a Permanent Account Number (“PAN”), which is issued by the Indian Income Tax Department. The PAN is then provided to the Indian payee so payment can be made. Understanding these issues in advance will help minimize delays in receiving payments.

Many times reduced withholding rates can be obtained under the US Income Tax Treaty with India. This process generally involves making a treaty based position claim in the format required by the Indian government. This process can take an extended period of time depending on the type of claim being requested. As a result, payments may have to be delayed in order to get the proper documentation necessary for the reduced withholding. Alternatively, taxes that are over-withheld may take several years to recover or never be recovered. While most withholding taxes would qualify as foreign tax credit against US tax liabilities, the formula for taking the credit is limited based on net foreign source income where tax is being withheld on gross income, which can result in an excess credit position.

To best manage this situation, it is recommended that US businesses:

  • Communicate with their India-based customers to understand, in advance, what taxes may be withheld from payments.
  • Consider whether pricing or contracts need to be adjusted to address withholding.
  • Speak with their tax advisors to determine if withholding rates can be reduced and the process for obtaining the reduction.
  • Coordinate the timing of payments with the customer so the proper documentation can be obtained before withholding occurs.

Our team is always ready to help.

Please contact us for more information.

Sue Tuson

Shareholder, International Tax

Contact Sue   |   Read Sue's bio

related news

Financial Management: 4 Key Technology Transformations

The accounting industry looks a lot different these days than it did 10 years ago. From shifts towards data-driven strategy to the implementation of new technological tools, the profession has…

Read full story

5 Financial Considerations for Architecture and Engineering Firms

Working with walls, light, shadow and the properties of a nearly endless array of building materials, architects and engineers create the spaces in which we live and work. Some are…

Read full story

How to Increase Tax Savings with a Roth IRA-Owned IC-DISC

Did You Know Combining these Strategies Can Help You Save Even More Tax Dollars? Many business owners may already be aware of the very popular tax saving strategies that exist…

Read full story

Family-Owned Businesses: Succession Planning

In this episode of The Sound of Automation podcast, Frank Lashier III, COO of Dominion Technologies Group, Inc. joins us to talk about the challenges of transitioning a business within a…

Read full story

Clayton & McKervey Announces Appointment as Key Global Partner for the Centuro Global Network

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—April 5, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is pleased…

Read full story

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