Are you a tax compliant while making payment of commission to a foreign entity? To know more about TDS on foreign commission, please read below

Are you a tax compliant while making payment of commission to a foreign entity? To know more about TDS on foreign commission, please read below

To know more about TDS on foreign commission, please read below

Introduction

With businesses now able to operate globally, it is possible that foreign agents are engaged by Indian entities for many business activities including sales, sales promotion, tie-ups, etc. The foreign agents are compensated with a commission for the services that they render for the Indian entity. Now the question is, when a business entity in India pays such commission to a foreign agent or a foreign entity, what are the direct tax implications on such transactions.

When an entity pays a commission to a foreign agent, the first thing to check is whether

  1. The foreign agent or the entity has a Permanent Establishment (PE) in India. Does the foreign entity have a tax base in India?

Deducting tax would solely depend on the answer to the above question

If the answer to the above question is Yes, then TDS would apply if

  • The foreign entity’s income is attributable to business connection in India &
  • The services were rendered in India

If the answer to the above question is No, then there would not be any TDS applicability

Rate at which TDS deducted

Payment made to non-residents (in this case – foreign entity WITH a PE in India) are subject to a TDS @ 30% with applicable surcharge.

Tax consequences on the payer

  1. Where the foreign agent does not have a PE in India, the payer is not liable to deduct TDS in India and the amount paid to the foreign agent is allowed as an expense under section 40 of the Income Tax Act
  2. Where the foreign agent has a PE in India and the payer fails to deduct TDS @30% on the transaction, there will be a disallowance of the entire expenditure due or paid to the foreign agent under the Income Tax Act

 

Author: CA. Anu Jose, FCA

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