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Fresh talks soon on pacts to avoid double taxation

Hema Ramakrishnan

NEW DELHI, Aug. 13

INDIA is set to re-negotiate a couple of double taxation avoidance agreements (DTAA) which are old. The move follows requests made by some countries to lower withholding tax from the rates which were negotiated at the time the agreements came into force, senior Government officials said.

The DTAAs which may be re-negotiated include the Indo-Korean pact which came into force in 1987. The Indian Government is also close to completing re-negotiations on the DTAA with Austria, signed in the mid-sixties. A similar move is on with the Indo-Net herlands DTAA.

Officials pointed out that even if the Government forgoes some tax revenues after re-negotiations, it should not be a cause for concern since one of the primary objectives of any DTAA is to bolster investment flows between two countries.

India had modified the DTAA with France to bring the scope and rate of taxation at source on dividends, interest, royalties and fees for technical services on par with the US and Germany which are members of the Organisation for Economic Cooperation and Development (OECD). The pact with Sweden - also an OECD country - was re-negotiated on similar lines.

Japanese withholding tax: In a related move, Japan may withdraw the 20 per cent withholding tax levied on payments made by subsidiaries of Indian software companies to the parent company exporting software.

``Both legal and business compulsions may force the Japanese authorities to accept the Indian Government's stand on the issue - on which the mutual agreement process available under the DTAA has already been invoked,'' said senior Government officials.

Indian subsidiaries of software companies are required to cough up with-holding tax in Japan on payments made to their parent company in India. These payments are in respect of software exported by the parent company to the subsidiary in Japan either aft er its development here or by developing the software by deputing personnel to Japan.

In a reply to a question in the Rajya Sabha, it had been pointed out that Japanese authorities had treated such payments as rendering of `technical services' and invoked the Article on `Fees for Technical Services' under the Indo-Japan DTAA. This interpr etation had been contested by Indian authorities who maintain that it is the sale of a product and hence not liable to income tax.

``However, the net effect of this problem will be only up to this year. With the Centre's move to bring export income under the tax net in a phased manner, software companies will henceforth be able to set-off the withholding tax liability against their tax liability here,'' officials said.

The Government may, however, have to forgo tax revenues in the process. It is precisely for this reason that the Indian Government wants to press for removal of the impost.