Lower Tax Deduction Certificate for Non Residents

Client Industry:  Furniture Industry 

Background :

The client was a German company having joint venture in India. The client wanted to sell its entire holding to its Indian JV Partner. For the same the client had carried out negotiations with the Indian JV partner and finalised a price for the same. The client had a capital gain on the transaction.

The gain which arrived to the client was subject to Capital Gain Tax. As a standard practice in India, for any remittance outside India a certificate has to be issued by a Chartered Accountant stating that whether tax has been deducted on the transaction. Also the tax so deducted has to be done on the gross value, unless the tax department has allowed the deduction of tax at a lower or actual rate. This approach would have created a huge cash outflow for the German entity in India in terms of taxes and claiming the same in Germany would have been an issue.

The client had approached IBA for the following :

• Calculation of the capital gain tax
• Negotiating with the JV partner for the respective taxes
• Suggesting ways of getting tax to be deducted on the net amount as against the gross amount
• Arranging for various regulatory requirements namely PAN, TAN etc in assistance on filing and executing the same

Our Approach :

• We reviewed all the documents related to the sale transaction and prepared a memo for the client mentioning the details about capital gain, tax thereon, withholding tax amount and how to ensure that only adequate amount as per the law can be withheld
• We advised the client to obtain lower deduction certificate from the Indian revenue authority, stating the rate at which tax should be withheld
• We gave a list of the documents which would need to be applied in India for getting the lower deduction certificate from the Income tax department
• We assisted them in getting the LDC from the authorities before the transaction date.

Outcome/Impact :

We successfully obtained lower deduction certificate before the transaction date which in turn, helped the client to complete the sale proceeds with requisite tax being withheld. Thus, the client did not face the issue of cash flow on excess tax deduction.