[Editorial notes: Do Indian companies need to pay TDS on payments made to AWS? It’s a grey area and Aditya, cofounder of Pugmarks.me takes a deep dive into this issue.]
There are quite a few Indian startups that use the Amazon Web Services for their computing needs. We happen to be one among them. Unfortunately, there is a lot of confusion about withholding taxes (TDS) on payments made to AWS. I am writing this article to share my findings on this topic.
Now, coming back to the question, should you withhold tax?
Short answer: No
If you like to know why we think so, please read further.
AWS does not have a permanent establishment (PE) in India. They are incorporated in the US. For companies that do not have a PE in India but have one in another country, the tax rules apply as per the Double Taxation Avoidance Agreement or DTAA, provided India has a DTAA with that country. India has signed the DTAA with many countries, including the US. This makes AWS a beneficiary of the DTAA that India has with US.
AWS too, is clear that they are not liable to pay taxes in India. What this means to a start-up is that AWS will not allow you to pay any amount lesser than whatever you have been billed for. If a startup withholds any tax, it is an additional expense on the start-up that is utilizing AWS services.
- If you were to be doing business with any company without a PE in India before 2010, then no tax would be applicable whatsoever. This was true of AWS as well.
- The Finance act in 2010 changed things a bit (and some of these were retrospective amendments). It was announced that for following three categories TDS is applicable, even without a PE :
– Income by way of Interest Payable
– Income by way of Royalty
– Income by way of Fees for Technical Services
- The payment we make to AWS cannot be classified either as Interest or as Royalty (as per the then definition of these categories). The only other option is FTS – Fees for Technical Services.
- Time and again, the Income Tax Appellate Tribunal (ITAT) has ruled that FTS is applicable only when the service is rendered by a human – there should a person working for you at the other end (think freelance programming, think consulting). Robots and Machines do not fall under this definition – and AWS is a machine rendered service. The ITAT ruling in the case of Siemens made this amply clear.
- Again, in the year 2012, the scope of the term Royalty was significantly enhanced. This caused further debate and questions arose if tax had to be withheld under the new definition of Royalty.
- But the DTAA (of which AWS is a beneficiary) still retains the pre-2012 definition of Royalty and this overrides any other definition found elsewhere, particularly when dealing with companies covered under the DTAA. This article should make it clear. So, AWS payments still remain out of the Royalty net.
- In summary, payments made to AWS cannot be classified as Interest payments, FTS or Royalty. For withholding tax under any other category other these, it is mandatory to have a PE in India. As I have mentioned earlier, AWS has no PE in India. This implies that we are not liable to withhold any taxes for payments made to AWS.
AWS has the documents necessary to support the fact that they do not have a PE in India and that they are a resident of the US for the purpose of taxation. If you are an AWS customer, you can contact them and they would be happy to help you.
- I am not a qualified chartered accountant. These views just represent my personal understanding of the topic. Please do your own research and/or contact a qualified chartered accountant for more information.
- Tax laws can change from time to time. Amendments can be made with retrospective effect, making you liable to pay taxes.