I have a bit complicated income tax query about TDS.
My company does their worldwide sales from USA. We have made sales to many countries and never had any major complication in taxation. Then we made a sale to India... and our woes began.
India has the concept of TDS (tax deducted at source), when a company makes payment to just anybody. This applies to foreign payments too. The TDS rates differ based on documentation presented. If the foreign company presents Indian PAN card, no-PE declaration and TRC (Tax residency certificate), the TDS will be just 10.5% only. If any of the document is missing, the TDS could be 25% or even 40%.
We have presented the 2013 TRC along with the rest of the documents. But the customer's accountant is demanding 2014 TRC. But here is the problem.
- In USA, the official tax filing deadline is April 15th every year. One has to file tax returns or file for an extension by April 15th.
- A company can apply for TRC for that year only after filing returns or filing extension. It takes 30-45 days to get the TRC issued, and there is no way to expedite the process. That means no US company can have their current year TRC before June.
Therefore, if every Indian customer insists on current year TRC, no USA company can get payment from India until June. This can't be right. No US vendor will do business with India under such circumstances. This just doesn't seem logical.
I checked with 2-3 accountants and nobody has any clarity on TRC since they don't deal with it.
So I have couple questions here:
1) Has Indian Government really created a law that deducts full TDS for US vendors for the first 5-6 months of every year? Why will US do business with India in the first half of the year then?
2) If the 25% or 40% TDS is done, can the vendor get credit from IRS for that full amount once he receives his TRC for the year?
PS: To add bit more clarity, the item sold happens to be software license. TDS is not usually done for products, but only on services. However, most accountants in India treat software as service than product. But the GOI has released a circular in 2012 clarifying the matter.
Look at section 5.4.4 in the following document:
http://www.cbec.gov.in/ub1213/do-jstru2.pdf
Software license is a sale of goods with transfer of right to use. Therefore, it is a product, not a service. They should not deduct TDS at all in this case.
Edit: It is resolved. The customer's CA agreed there can't be TDS since it is sale of goods, according to section 5.4.4 clause. And last year's TRC is acceptable as long as we provide the new TRC when it becomes available. What a relief!