Services rendered from outside India for use within the country will now come under the tax net, following the recent amendment to the I-T Act.
The amendment in Section 9 of Income-Tax Act, proposed in the Budget, will now bring all services, including fees on technical service or royalty that are typically charged as consultation fees, under the tax net. This would also be irrespective of whether the service provider has business connection in India, or residence or place of business.
The SC, in its decision on Ishikawajima Harima Heavy Industries, had concluded that in order to tax a non-residents income, the services should be rendered and utilised in India. But the government wanted to make it clear that it would levy tax on the payment to a non-resident, if the service is utilised in India, irrespective of whether the service is rendered in India or not.
According to people familiar with legal developments, if a non-resident architect is paid for consultation on a building situated in India, it means that his services have been utilised in India. Prior to the amendment, the architects consultation fees would have been taxed had he been based in India.
Going by this example, the government will now tax the non-resident architect, even if he doesnt come to India and renders the service from outside India. According to M Lakshminarayanan, national tax head at Deloitte India, Its a clarificatory amendment making the intention of the legislature clearer.
Vispi T Patel of Vispi T Patel & Associates, a chartered accountant firm, said: The amendment has serious implications. It will certainly lead to litigations. Moreover, the amendment is not clear as regards its applicability on income by way of interest and royalty earned by a non-resident outside India where there is no nexus between such interest and royalty and Indian state.