BUDGET WISHLIST: Witholding Tax

CEO-SPEAK: Habil Khorakiwala, Chairman, Wockhardt

"We need to replace the concept of business connection with 'permanent establishment' as threshold for taxing business income. The concept of Participation Exemption in the Indian context should also be introduced"

CHAMBER-SPEAK

FICCI
There is a need to review all the 70 tax treaties India has entered with reference to withholding tax rates in terms of royalty, dividend, interest etc and to fit into the developments which have taken place worldwide.

The government may explore the possibility of developing an "India model treaty" providing guidance on the intent of certain treaty provisions.

STATE OF PLAY

Rajiv Anand
Executive Director, PricewaterhouseCoopers

The Honourable Tribunal in few cases has taken a view that the payer is always under an obligation to approach the tax department and obtain "No Objection Certificate" before making any remittance to payee. This is notwithstanding the fact that the remittance is not taxable in India in the payee's hands. The Budget should clarify that considering the Apex Court decision in Transmission Corporation, the payer is under no obligation to approach the tax department. He is authorised to make remittance even on basis of an accountant's certificate. The payer cannot be held as an assessee in default for making remittance without approaching the department and the payment is finally held not taxable in India.

Where the payer defaults in TDS obligation, the tax authority passes an order under section 201(1) of the I-T Act and recovers the tax from him, unless he is able to prove that the tax has already been paid by payee. Since the primary obligation of payment of tax is on the person who earns the income (payee), necessary amendments should be brought in the Act to provide that no tax would be recovered from the payer who has defaulted in his TDS obligation. Such tax should be recovered from payee direct. The payer though would continue to be under an obligation to pay interest and penalty as per law.

From a plain reading of law, non residents are also required to deduct tax while making payments to residents and non residents. There are practical difficulties for foreign companies having no place of business in India to comply with TDS formalities. It is therefore desirable that provisions relating to TDS be restricted to cases where foreign enterprises have a place of business in India.

There are situations involving financial institutions where interest is payable to the unit holders. These units are transferable and the interest thereon is payable to holders whose names appear in the register as on a record date. It is possible that the payers do not know the persons to whom the interest would ultimately be payable, since the record date is subsequent to the date of providing for interest in the books of payer. To avoid any litigation, it may be clarified that in situations like these no TDS obligation would vest on the payer at the item of credit of such interest in its books.