Indian Cabinet Approves Cut In Withholding Taxes With Japan

by Lorys Charalambous, Tax-News.com, Cyprus

17 February 2006

The Indian Cabinet has given its approval to the protocol amending the agreement between India and Japan for the Avoidance of Double Taxation and Prevention of Fiscal Evasion, which has cut withholding taxes.

The first round of negotiations for amending the Double Taxation Avoidance Convention was held in Tokyo in February, 2005 and the final round was held in New Delhi in October, 2005 where it was agreed that withholding tax on fees for technical services will be cut to 10% from 20%.

Welcoming the conclusion of the agreement, the Indian cabinet said that the lower taxes will help promote bilateral trade between India and Japan.

"The Agreement will stimulate the flow of capital, technology and personnel from India to Japan and vice-versa. It will provide tax stability and also reduce any obstacles for providing mutual cooperation," a cabinet statement explained.

However, companies in the software sector will be disappointed that the withholding tax has not been reduced to 0% - as in other bilateral tax treaties entered into by India - a move for which the software industries in both countries lobbied hard to win.

The new agreement also sees withholding tax on dividend and interest income earned from cross-border investment cut to 10%.

Formerly, the withholding tax rate on dividend income stood at 15%, while the tax rate for interest income is 10% for banks and 15% for other companies.

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