TDS burden on non-taxable foreign remittances

Recently, Uber restructured its operations and moved its entire India business to the Indian domiciled Uber India Systems. Earlier, Uber India was only engaged in providing marketing and support functions to Uber B.V., a company which was registered in Netherlands and had responsibility of performing core functions with respect to Uber’s operations in India, such as processing payments, etc.

One of the primary reasons cited for the restructure was an issue encountered by Uber India, with respect to tax deduction of payments made to its foreign entity, Uber B.V.

As per the Income-Tax Act, any person who is responsible for paying to a foreign company any sum chargeable under the provisions of the Act is required to deduct income tax while crediting such payment to the account of the foreign company.

Failure to deduct tax and pay the same to the government entails severe consequences such as levy of interest, penalty proceedings, etc.

This article discusses the serious implications of this provision, and the hardship that it causes to foreign companies catering to Indian markets as well as their Indian clients.

It is relevant to note that the question of tax deduction is linked with the tax liability of the foreign company. Under the scheme of the Act, business profit of a non-resident is taxable only when income is deemed to accrue or arise in India through a business establishment in India.

No tax liability

Before restructuring, Uber Netherlands was responsible for performing all main functions such as processing worldwide payments and contracting with drivers, and Uber India was merely providing support services and thus did not form a business establishment in India.

Uber, therefore, cannot be said to have any tax liability under the Act or under the treaty. Since the sum paid to Uber Netherland is not chargeable to tax, there is no requirement for any deduction of income tax under the aforementioned provision.

Notably, this assessment of whether tax is chargeable under the Act and subsequently whether deduction is required, is largely fact-based. The extent of the operations conducted by Uber India and Uber B.V. are the only facts relevant to this determination. However, the Act places the responsibility to make this assessment and deduct tax, on the ‘person who is responsible for paying’ the sum to the foreign entity.

In this case, such persons are Uber’s Indian clients who are not usually privy to the details of the organisation’s functioning and consequently unable to make this determination. Even if they ask Uber for the relevant information, since failure to deduct tax would result in a default on the Indian clients’ part such Indian clients tend to deduct tax indiscriminately in all cases.

This is evident from the fact that three of Uber’s Indian corporate clients have reportedly stated that while they are aware that the sum they paid to Uber B.V. is not chargeable to tax, they fear that the liability for non-deduction would fall on them, and hence they deduct tax irrespective of the settled position.

It is understood though, that whatever tax is deducted at source is only a provisional payment made to the Central Government and can be claimed back as refund after filing return of income. However, filing of return of income for non-residents when they have zero tax liability is just an added compliance burden and also impacts the working capital of the business.

The objective of this provision was to ensure that tax on income of non-residents and foreign companies, wherever applicable, is deducted at source itself and the tax authorities avoid the administrative hassle of recovering the amount from an organisation based in a foreign jurisdiction, whose connections with India may be transient or whose assets in India may not be sufficient to meet tax liability.

However, the provision has an overreaching effect on other foreign companies as well, who do not even have any tax liability at all. This issue will persist for all foreign remittances where the sum is not chargeable to tax, however Indian clients, to avoid any tax proceedings, will deduct tax at source. Thus, an effective legal framework needs to be evolved to avoid hardships to non-resident as well as Indian clients as it affects the ease of doing business.

The writer is a Research Fellow in the Tax Law Vertical at Vidhi Centre for Legal Policy. The views are personal

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