10% tax on services in DTAA pact

If you are an employee of a foreign company in India, your business income will be taxable if you have spent 90 days in the country in the past 12 months. The amended India-Mauritius tax treaty has also inserted a new clause allowing source-based taxation at 10 per cent on fees paid for technical and consultancy services.

The revision provides for 10 per cent tax on gross basis for fees for technical services (FTS) in the source state, according to the text of the treaty amendment, which was signed on Tuesday. So far, a company or entity was deemed to have a permanent establishment (PE) in India if it had a place of business or site or office building or factory workshop.

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According to tax experts, now if a company's employees spend 90 man days in India, then the companies' business income in India will be taxable at 40 per cent. Through the inclusion of the services PE clause, the tax net has been widened, an expert said adding that tax credit can be obtained.

The tax will be at the highest applicable rate between the two countries. As per the protocol, the definition of PE has been enlarged to include furnishing of services, including consultancy services, by an enterprise through employees or other personnel for more than 90 days within any 12 months.

The amendment to the more than three-decade old treaty, which aims to plug a loophole which allowed investors to use the Mauritius route to evade taxes on capital gains in India, also gives right to the source country to levy 7.5 per cent tax on interest earned. The original treaty of August 1983 provided exemption on interest received by banks in the source state when they are residents of the other country.

The amendment has removed this exemption, as per the text of the revised protocol. However, exemption would continue to be granted in the case of interest arising from debt claims existing on or before March 31, 2017, provided it is derived and beneficially owned by any bank resident of the other country carrying on bona fide banking business in the source state.

Minister of state for finance Jayant Sinha met representatives of foreign portfolio investors (FPIs) and deliberated on their concerns over taxation against the backdrop of India signing a revised tax treaty with Mauritius.

"Met FPIs with (Revenue Secretary Hasmukh Adhia) for an intense discussion on tax concerns such as GAAR, tax treaties' implications, etc," Sinha tweeted. FPIs encompass all foreign institutional investors, their sub-accounts and qualified foreign investors.

The meeting came amid concerns being expressed by tax experts about the taxation of participatory notes and the impact which the treaty revision can have over investment from other countries, including Singapore, Cyprus, and other low tax jurisdictions.