We are an UK-based consultancy firm and have been retained to provide services to an Indian client. Will the consultancy fees to be paid to us by our Indian client be subject to income tax or withholding tax if we do not have an office in India?

The Double Taxation Avoidance Agreement (DTAA) between India and the UK subjects consultancy fees received by an UK-based firm from an Indian client to income tax/withholding tax in India if (i) members of the firm are present in India for periods aggregating to 90 days in a financial year (i.e., April 1 of a year to March 31 of the subsequent year) or (ii) the fees are received for consultancy services provided by such firm from a fixed base regularly available to it in India.

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Therefore, even if you do not have an office in India, the fees received from your Indian client may still be taxable in India (@ 36.75 per cent during financial year 2002-03), if members of your firm are present in India for a period aggregating 90 days in a financial year. The Income Tax Appellate Tribunal (Mumbai) has, however, recently held that "members" under the DTTA include "employees" and not only "partners" of the firm. Therefore, your taxability in India will depend on the total time spent by your partners and employees in India in providing consultancy services. However, only so much of your fees will be taxable in India as is attributable to services provided to your client during those 90 or more days when your members are in India.

If liable to income tax in India, your fees will also be subject to withholding tax and your client will need to deduct such tax on your fees. Therefore, as the period of stay in India of your members may exceed 90 days, subsequently during the year, your client may insist deducting withholding tax (@ 31.5 per cent on fees paid during financial year 2002-2003). If at the end of the financial year, you determine that your members have stayed in India for less than 90 days, you can claim refund of the withholding tax from the Department of Income Tax stating that your income is not taxable in India. On the other hand, if your income is taxable in India, you will need to file a tax return and pay additional tax/claim refund of the withholding tax, as the case may be, after availing deductible expenses. As per the Double Taxation Avoidance Agreement, you can obtain credit against your total income tax liability in UK for the income tax paid in India.

Is there any monetary limit on companies making political contributions? Are such contributions tax-exempt?

Under the Companies Act, 1956, the aggregate contributions by any company in the course of a financial year to political parties or to any person for a political purpose is limited to 5 per cent of the average net profits of such company during the immediately preceding three financial years.

A government company (meaning a company in which at least 51 per cent of paid-up shares are held by the Central or a state government or that is a subsidiary of any government company) or a company that is in existence for less than three years are, however, prohibited from making any political contributions whatsoever. Further, political contributions within the aforesaid 5 per cent limit, by a non-government company in existence for more than three years need to be authorised by the Board of Directors of such company by a resolution passed at a meeting.

At present, political contributions by companies are not tax deductible or tax-exempt. The Election and Other Related Laws (Amendment) Bill, 2002, however proposes to amend the Income Tax Act, 1961, to allow companies to deduct political contributions from their income while computing the income tax liability.

The views expressed here should not be construed as legal opinion and are for reference only. Business Today and/or the author will not be responsible for any decision taken by readers on the basis of these views. Please send in your queries to Legal.bt@intoday.com or Going By The Book, c/o Business Today, Videocon Tower, 5th Floor, E-1, Jhandewalan Extn., New Delhi-110055.