Notes for Japanese Expatriates in India 

regarding Indian Income tax 

by - MLG Associates, Chartered Accountants

Quick reckoner of Tax Rates in Japan click here

Quick reckoner of Tax Rates in India click here

The Income Tax law of India has defined the taxation liability of any company/individual who comes to India and earns money here. There are many permutations and combinations. However to make the things simple and to keep the tax liability as low as possible, we suggest the following methodology.

Step 1. Indian Company should help the Foreign Consultant from Japan to get a Indian Income Tax PAN ( Permanent Account Number).

Step 2. Indian Company is then allowed to Deduct the TDS (Withholding tax) at rate of just 10%

Step 3. Japanese Consultant is free. No need to pay tax on this income again, even in Japan .

Step 4. Japanese Consultant has a further facility. He is not required to file any income tax return in India after this. ( Just for knowledge, even if he does, the net income tax payable will be ZERO, since tax payable 10%, TDS done , same 10% ) Hence balance payable = ZERO. Infact if the Japanese is spending some money for the hotel stay, Air travel, Food, office assistants, secretarial work, other expenses for the work in India, then all those expenses are further deductible from this income. Final Tax will infact be negative and a refund from the Indian Income Tax Department is possible

This above is the master summary of the income tax provisions, read with the Double Tax Avoidance Treaty between India and Japan . We at MLG Associates, can help both the parties in getting the above benefits.

Just for information the TDS Rates for Foreigners in Japan are Double that of India ( They are currently at 20%). the Income tax rates are also upto 50% of the marginal income at the highest slab( refer details).

So, it makes most sense in getting the TDS deducted in India. Filing the optional return in india, and getting this income as 100% tax free in Japan.

Legal position regarding

 click here for answers 

First  : What is the tax liability ?  

Second : Does Japanese person have to file the return in india ?

Third  : What is the TDS provision ( Withholding tax ) ?

Fourth :  DTAA of India with Japan   ?

Fifth : What about PAN ( Indian Income tax permanent account number ) ?

 

 

 

 

 

First  : What is the tax liability ?   

Second : Does he have to file the return in india ?

The law has a special provision for contracts like this

( Technical Services related contracts ). Please see the law below.

Core Idea ΰ condition is

a)      if that person is a non-resident of India ΰ      ok, agreed

b)      if that person is getting income in form of fees for technical consultancy θ            yes it is ok

c)      agreement is with an Indian concern ΰ ok, agreed

d)      the agreement is in accordance with the Industrial policy of India , then

 

 

(if the above is ok, then) ΰ Then,

Benefit number 1 is   

a)     Tax will be 10% only  ( on that income )

 

Benefit number 2 is

b)    No return of Income is to be filed.

 

 


 

Proof ΰ law verbatim is as under

 

“ ………………

 

 [Tax on dividends, royalty and technical service fees in the case of foreign companies. ]

 

Section 115A. [(1) Where the total income of—

              (a)   ………

             (b)   [a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA] received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,—

            [(A)   …………..(not relevant)

             (B)   …………..(not relevant)

          [(BB)   the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of ten per cent if such fees for technical services are received in pursuance of an agreement made on or after the 1st day of June, 2005; and]

             (C)   …………….(not relevant here)

Explanation.—For the purposes of this section,—

              (a)   “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ;

             (b)   “foreign currency” shall have the same meaning as in the Explanation below item (g) of sub-clause (iv) of clause (15) of section 10 ;

 

Para (5) of section 115A

(5) It shall not be necessary for an assessee referred to in sub-section (1) to furnish under sub-section (1) of section 139 a return of his or its income if—

     (a)   his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to in clause (a) of sub-section (1); and

     (b)   the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.]

 

 

Third  : What is the TDS provision ( Withholding tax ) ?

 

Question 3A : Is this covered in Section 194 J = Payment to Professionals ?

Answer = No

That section is only for “residents”

 

Question 3B: Is this covered in Section 195 = Payment to Non Residents ?

Answer = Yes

That section is only for “non-residents”

 

 

Question 3C: What is the rate of TDS  for this case ?

Answer = the section 195 lays down a TDS rate of 30%. But this will be reduced in case of this Japanese citizen, since Indian Govt has a DTAA with Japan ( Double Tax Avoidance Treaty)

 

Fourth :  DTAA of India with Japan   ?

Question: What is the applicable Rate as per DTAA of India with Japan   ?

Answer = The DTAA of India with Japan was recently amended. ( in June 2006) . And the rate has been set at 10% only. That is great . Since now the Max rate that Japanese technical consultant can be charged to tax in India is only 10%.

 Proof :

“…….. Excerpts from DTAA India-Japan

ARTICLE 12 - 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State .

 

[2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.]

…………………..”

So, (if the above is ok, then) ΰ Then,

Benefit  is   

TDS will be 10% only 

Fifth : What about PAN ( Indian Income tax permanent account number ) ?

Yes, it is compulsory . Else TDS rate will rise to 20% immediately

Proof : -

 

Requirement to furnish Permanent Account Number.

206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—

               (i)   at the rate specified in the relevant provision of this Act; or

              (ii)   at the rate or rates in force; or

             (iii)  at the rate of twenty per cent.

………….

…………

 (5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.

 

 

The above provisions will be applicable to all assesses. The intent of the legislature is clear from the Memorandum to the Finance Bill, which specifically provides that these provisions will also apply to the NON-RESIDENTS.

The aforesaid legal position has again been reiterated by CBDT through its Press Note dated 20th January, 2010 which states: "A new provision relating to tax deduction at source under the Income Tax Act 1961 will become applicable with effect from 1st April, 2010.

Tax at higher of the prescribed rate or 20 per cent will be deducted on all transactions liable to TDS, where the Permanent Account Number of the deductee is not available. The law will also apply to all non-residents in respect of payments/remittances liable to TDS.

The issue is particularly important to non-residents because in most of the cases their income is generally taxable @10 per cent ( in case of most DTAA countries)  while in the absence of PAN, tax will be deducted @20 per cent.

 

Nevertheless, there is a possibility that after section 206AA comes into force, i.e. w.e.f. 01.04.2010, the income of non-residents could be subjected to higher rate of TDS @20 per cent if PAN is not available. And the first level assessing officer may take this plea.

 

In such cases, in order to claim refund of excess TDS deposited, the non-residents will have to file their return of income in India . This will be a cumbersome procedure.

 

The procedure for obtaining PAN is simple, inexpensive and quick. Non-residents can apply through the local embassy / consulate of India . Applications can also be filed, paid for or tracked online through the Internet.

 

Non-residents are strongly advised to obtain Permanent Account Number (PAN) before receiving any income from India .

 

We at MLG help desk can help the members get the same for their Non resident employees, consultants, collaborators and JV partners etc.

 

 

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