S Korea, India may rework withholding tax norms
S Korea, India may rework withholding tax norms HEMA RAMAKRISHNAN
TIMES NEWS NETWORK [ TUESDAY, MAY 24, 2005 11:57:15 PM] NEW DELHI: Korean chaebols Hyundai Motors, Samsung, LG and Indian software giants may soon be able to raise a toast. The effective tax liability of these enterprises may drop, as South Korea is pushing for a cut in the withholding tax on royalties and fee for technical services to 5%.
South Korea and India are re-negotiating the double taxation avoidance treaty. Withholding tax refers to tax required to be deducted at source (TDS) under the domestic law on income accruing to residents of a foreign country.
The income can be in the form of dividends, interest or royalty. The tax payer can claim credit in Korea on taxes paid in India. Ditto for Indian companies in Korea.
The tax on interest, royalty and FTS is 15% under the tax treaty with Korea. The rate on royalties and FTS has been lowered to 10% in India — which is also the rate prescribed in the model DTAA. South Korea is negotiating for pruning the rate to 5%. However, a final view is yet to be taken.
The tax on shipping income is also up for review to provide relief to Korean and Indian shipping companies. If shipping income is exempt from tax — as is the case with UK or Singapore — transaction costs will be lower and this will also encourage cross border flow of goods between India and Korea. India-Korea trade is over $4bn.
“Korean companies have significant operations in India and some of them have announced plans to make India a sourcing hub for exports. The lowering of withholding tax rate will stimulate investment flow and technical know-how from Korea,” according to Samir Gandhi of Deloitte Haskins and Sells.
He reckons that the reduction in the withholding tax rate will also help Indian companies, mainly in the manufacturing and software sectors, who have invested or have plans to establish operations in South Korea.
The provisions of the DTAA with South Korea broadly says that profits derived from the operation of ships in international waters will also be taxed in India. However, the tax will be limited to 50% of the tax otherwise imposed under India’s domestic law after an agreement relating to shipping is entered into between the two countries. India is now insisting on a maritime agreement to be in place.
The effective tax rate under domestic law hence works out to around 3.14%. In fact, in some of the recent treaties, with Singapore and UK, shipping income of the foreign company in the course of international traffic is not taxed in India. A joint study group has been set up to look at a free trade agreement between India and Korea. But negotiations under the DTAA are underway.