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INDIA BUSINESS WORLD - 16th March To 31st March - 2009
TDS ON MNCS' INDIA STAFF
THE Supreme Court has held that a foreign company registered and situated abroad is liable to deduct tax on salaries paid in the home country to employees working in India, in a ruling that could have serious ramifications for multinational companies and their expat employees.
Tax experts say the court has, in effect, ruled that TDS provisions can be extended beyond the borders of the country. However, the court has said the observations made in respect of this case only pertained to salary provisions and would not be applicable to the issue in question in the high-profile Hutchison Vodafone case.
"The court's observation on extraterritorial application of TDS provisions may have much wider implications beyond salary taxation," said Amitabh Singh, partner, Ernst & Young. The apex court disposed off a batch of appeals by the income-tax department, which had come in appeal after losing the case in High Court and tax tribunal.
The cases date back to 1999-2000 and pertain to non-deduction of tax on salary paid to an expat employee working in India, in home country by the MNC. The apex court, however, has also given relief to a number of MNCs including Mitsui, Mitsubishi, Lurgi, Ericsson and dropped penalty imposed by the income-tax department on them for not deducting tax at source on salary paid in home country to their expat employees working in India. The tax liability in the case is estimated at Rs 200 crore.
The income-tax department's action against these multinational companies had created quite a furore then. "Withholding tax obligation would apply even in situations where the salary was paid overseas for services rendered in India. Though, this is the correct position, some of the Japanese employers took the plea that since they are non-residents and the salary was paid overseas, withholding tax obligations should not be fastened upon them despite the fact that such income was liable to tax,” said Mukesh Butani, partner, BMR & Co.
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