Indian Withholding Tax issues and Requirement of a PAN
Withholding Tax issue in India and the requirement of obtaining a Permanent Account Number (‘PAN’ - tax identification number) from Indian authorities by the operators (offering IUC/ roaming services to their counterparts operating in India) to avoid additional tax cost on the operators.
As per the provisions of Indian Income tax laws (‘IT Act’), every person receiving payments from India that are subject to tax withholding in India is mandatorily required to quote his/ her PAN to the person responsible for making payments, failing which the person responsible to make payments is under an obligation to withhold taxes at a rate that is higher than the prescribed rate for tax withholding.
Taxation of fee for IUC and roaming services extended by operators outside India to operators in India has been a subject matter of extensive litigation in India. Indian Revenue authorities do not accept the position that service fee payable by Indian telecom operators to telecom operators outside India is not taxable in India. Some recent appellate rulings, especially after amendments in the IT Act, have also taken an adverse view and the Indian Revenue authorities treat Indian telecom operators as ‘taxpayers in default’ for non-withholding of tax and seek to recover the tax amount allegedly not/short withheld, from the Indian telecom operators, along with interest and penalty.
In such an event, unavailability of the PAN of telecom operators, rendering IUC and roaming services, increases the disputed tax amount (almost up to twice which is procedurally avoidable) as the Revenue authorities seek to recover the alleged shortfall in tax, computed based on a higher rate of tax withholding. Further, the interest and penalty amount is also computed based on a higher tax demand.
It is thus in the interest both the payer and payee operators that additional tax liability, imposed purely for the reason that PAN of the service provider is not available, is eliminated by obtaining the PAN which is only a matter of procedure and can be done very easily.
PAN is a unique tax identification number used by Indian Revenue authorities to maintain data related to tax payers in India and it does not per se trigger taxability or tax compliance in India. A Telecom Operator outside India (TO) would not be required to set up an office or any other fixed place of business in India and a PAN can be applied for with TO’s address in home country.
In summary, while taxability of a TO could always be questioned by Indian Revenue authorities irrespective of whether the TO has a PAN or not, there are no additional ramifications in terms of tax implications, compliance, exposure, etc. for them if they seek a PAN in India.
In view of the above mentioned significant financial hardship faced by Indian telecom operators on account of non-availability of PAN in India, we request our Member operators to seek a PAN in India.