Why filing an Income Tax Return (ITR) is non-negotiable for foreign businesses?
Foreign businesses and non-resident entities earning income from India – say through royalties, interest, technical services, or dividends – tend to avail the benefits of the Double Taxation Avoidance Agreement (DTAA) in order to minimize or waive their tax burden in India. These advantages are generally invoked on the premise that the income is either tax deductible only in the home country or exempt in India for lack of a Permanent Establishment (PE).
But here’s the catch: most foreign entities overlook one critical compliance requirement that could jeopardize their DTAA claims entirely — filing an ITR in India. This non-compliance can have serious consequences under the Indian tax laws and will vitiate the validity of treaty claim, whether the tax has been withheld at source or not.
Isn’t DTAA enough to claim tax relief in India?
The Mandatory Filing of ITR
According to Section 139(1) of the Income-tax Act, 1961, all companies regardless of their residential status shall prepare and file a return of income in India if they have received any income in the country during a financial year. The provision does not exclude an exemption on the mere grounds of the income being claimed to be exempt or not to be taxed under a DTAA. That is, the filing obligation arises regardless of whether or not the income happens to be taxable. The threshold of taxability is not the trigger; receipt or accrual of Indian income is sufficient to justify filing of return. Therefore, foreign entities earning income from India—such as fees for technical services, royalties, dividends, or interest—are legally required to file an ITR in India, even if they claim tax exemption or reduced rates under a DTAA. This applies in cases involving provisions like the absence of a ‘make available’ clause, business profits without a Permanent Establishment, or other treaty-based benefits.
What happens if you don’t file an ITR?
Non-compliance with the return filing obligation can result in a host of negative effects:
- Disqualification from DTAA benefits: While Section 90(4) of the Act requires the submission of a Tax Residency Certificate (TRC) to be eligible for DTAA benefits, mere submission of TRC and Form 10F to the Indian payer is not considered adequate. The tax authorities can most probably check the correctness and admissibility of the DTAA claim, and the check is possible only if an ITR is filed. In the absence of a return, there are no official grounds for the tax officer to check if the income is eligible for exemption under the treaty, or if a Permanent Establishment is there in India or not. Additionally, the effects of non-filing extend beyond procedural denial.
- Late fees and penalties: Even if the income is ultimately held to be exempt, failure to file a return within the given timeframes can bring in late filing charges under Section 234F and even penalties under other sections of the Act.
- Compliance risks for your Indian clients: From a more generic compliance point of view, the failure to file returns can also reflect negatively on the Indian clients dealing with such foreign suppliers, prompting questions during their own audits or assessments. As such, filing a NIL return in India must not be considered unnecessary or optional.
- No clarity on PE status: Without an ITR, there’s no way to formally declare the absence of a Permanent Establishment in India—opening doors to future scrutiny. Hence, filing a return is a compliance measure that enables the foreign taxpayer to officially state and record their treaty position. Under the ITR, the taxpayer will be able to reveal the quantum and nature of income, the relevant article of the DTAA under which exemption is claimed, and a statement that no Permanent Establishment is present in India. This filing establishes a paper trail on which tax authorities can inspect and keep as a reference, providing increased certainty and transparency for both the taxpayer and Indian payer.
What should foreign companies do to stay compliant?
Filing requirements of ITR
At this juncture, it is necessary on the part of foreign entities to undertake certain initial steps to ascertain effective compliance.
Step1: PAN
Obtain a Permanent Account Number (PAN), which is a must for filing the ITR.
Step 2: DSC
For foreign companies, a Digital Signature Certificate (DSC) is also necessary in order to file the return electronically.
Step 3: Submit proper documentation
The TRC should be protected from taxation by the taxation authorities of the country of residence, and Form 10F should be filled correctly and preserved. Besides, a declaration of non-availability of PE in India along with copies of agreements, emails, and other documents in connection with Indian clients should be preserved.
Step 4: Preserve any supporting records
Copies of contracts, emails, invoices, and communication with Indian clients may be needed during assessment by the Indian tax authorities.
Why does it matter now more than ever?
Filing an ITR—no matter how small or tax-exempt the income—provides a legal safeguard. The DTAA provisions are significant legal reliefs that must be positively availed of and backed by proper filings and documents. Filing an ITR even where income is exempted, is an integral part of this process. It not only supports the validity of the treaty claim but also assists in reducing the threats of future assessments, penalties, or litigations.
In today’s heightened compliance environment, this one step is worth miles in protecting the interest of non-resident taxpayers and facilitating easier international tax transactions.
Need help filing a NIL return or managing your DTAA claims in India? AKM Global can assist you every step of the way – here’s how.
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