Mazars Tax Update | Edition 16.20

Impact of Multilateral Instrument (MLI) on application of WHT under DTAA

The Multi-lateral instrument (‘MLI’) is one of the BEPS measures that India adopted. The introduction of the MLI has resulted in a paradigm shift in the way countries would now deal with taxing cross border transactions. As various counties including India sail their way into the implementation phase, there would be several aspects that would require deliberation and thinking at this stage.

Taxpayer would need to give due consideration to procedural safeguards which need to be considered while granting treaty benefits at the withholding tax stage. Payments made by an Indian entity to an overseas entity towards dividend, interest, royalty, FTS wherein treaty benefit is sought, will be subject to fulfilment of ‘Principal Purpose Test’ (PPT).  Similarly, any capital gains exemption sought under the Treaty, may also be subject to fulfilment of PPT.

WHT obligation under section 195 of the Income Tax Act, 1961 is linked to taxability under section 5 and section 9 read with Section 90. There can be potential consequences for WHT default which may lead to disallowance of expenses or being treated as assessee in default, interest, penalty on such defaults may arise. To safeguard from such adverse consequences, we have tried to list out few questions which needs to be answered before the application of WHT as per DTAA and encapsulated the same in this document, we hope that it would be an informative read.