India has entered into tax treaties with a number of countries including, Australia, Belgium, Canada, Denmark, France, Germany, Indonesia, Japan, Korea, Mauritius, Singapore, the United Kingdom and the United States. These treaties endeavor to avoid double taxation and attract know- how and technology. In many treaties the withholding tax on royalties and fees for technical services emanating from India is lower than the general tax rate. A careful planning and corporate structuring can reduce the tax obligations considerably. The following treaties have been successfully used by international investors to reduce their tax obligations in India and in their home countries:
(a) India - U.S.A. Tax Treaty
The Indo-U.S. tax treaty considerably reduces the withholding tax in India for royalties, fees for technical services, and for interest paid to the US banks and financial institutions. The withholding tax on dividends arising out of India is 15%, if the parent company owns at least 10% of the voting stock. The withholding tax on royalties and technical services fees is at the rate of 15%. The capital gains is taxed at a rate of 20%. The withholding tax on rental of equipment and interest paid to U.S. banks and financial institutions is at the rate of 10%. All these rates are lower than the regular withholding tax rates.
(b) India - Mauritius Tax Treaty
The withholding tax rates for dividends and capital gains can be reduced further by a careful corporate structuring and tax planning. The Indo-Mauritius tax treaty offers reduced withholding taxes for companies incorporated in the island country of Mauritius. Recently some U.S. companies have invested in India through offshore subsidiaries incorporated in Mauritius. For companies incorporated in Mauritius there is no withholding tax on capital gains in India and the withholding tax on dividends is only 5%. The companies incorporated in Mauritius, at present, can opt not to pay any tax in Mauritius.