Fees for technical service in India
This insight is provided by Moore Singhi in India, fellow member of Moore Global network.
After the recent G20 Summit in Brazil last year and following a bilateral meeting between India’s Prime Minister, Narendra Modi, and the UK’s Prime Minister, Sir Kier Starmer, announced that UK-India trade talks will relaunch in 2025. India being the world’s fifth largest economy and a vital trading partner of the UK, the UK government believes that there is a good deal to be done that works for both nations.
With high growth prospects, regulations surrounding business transactions between both countries must be understood. Here we discuss one such transaction, namely the fees for technical services (FTS) received by UK businesses in India.
Under the Income Tax Act 1961 (ITA) which regulates the income-tax provisions in India, FTS is defined as “any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the heading ‘salaries’”.
These services are generally performed outside India and payment is also received outside India. The question is, when will this income be taxable in India? For this, it needs to be determined whether the income is deemed to accrue or arise in India, thus:
- When paid by the Indian government;
- When paid by a resident of India;
- When paid by another non-resident but the services are utilised by the non-resident payer in a business or profession that the payer carries on in India; or
- When paid by another non-resident and the non-resident payer uses the services for the purposes of making or earning any income from any source in India.
Please note that the FTS in the following categories may not be taxable in India even if paid by the government or a resident:
- The FTS payable in pursuance of agreement made before 1 April 1976 and approved by the central government in India;
- Used in a business or profession carried on by the payer outside India;
- Used for the purposes of making, creating or earning any income from any source outside India.
To understand the taxability of the FTS, the classification of such income for the company needs to be understood. This depends on whether the receipt of the FTS – i.e. the non-resident (recipient) – has a permanent establishment in India or not. Generally, a permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
If the recipient has a permanent establishment in India, income from the FTS is treated as business income and taxable as per the rates in force. However, if the recipient does not have a permanent establishment in India, income is treated as income from other sources and taxable at the rate of 20% along with the applicable surcharge and cess. Therefore, any person, before making payments to a recipient in the nature of the FTS shall be required to withhold appropriate taxes.
Apart from this, if the recipient’s income from India is only composed of the FTS and if the taxes for the entire income are withheld at rates not less than the rate specified above, the recipient does not become liable to file their income return in India.
India and the UK have signed a double tax avoidance agreement (DTAA). Accordingly, to determine the taxation rights and rates of taxation, the recipient may check the taxability of the FTS under DTAA. Article 13 deals with income by way of the FTS, whereby the FTS may be taxable in India only if it qualifies as the FTS under clause 13(4). The rate of FTS applicable as per DTAA is 10-15%. To access the treaty benefits, the recipient will be required to hold a valid tax residency certificate (TRC) and a Form 10F if applicable.
Nevertheless, the recipient will have to file an income return in India to claim any relief of taxation in terms of scope or rate under DTAA. However, if the taxes are withheld at the rates specified under the ITA , the recipient having income only from the FTS shall not be liable to file an income tax return in India.
All the tax filings can be completed online, giving flexibility to the recipient to comply with tax obligations associated with the FTS from India. In a welcome move, the Indian tax authorities have introduced a facility to enable non-residents to register on the income tax portal without obtaining a PAN, to complete their Form 10F filing requirements.
If you are facing such a situation or need help determining taxability of fees for technical service in India receipts from India, please contact Moore Singhi.
