Many foreign companies setting up an entity in India prefer to begin their innings in India from a small space in a business centre and then to move into a larger office.

What are Business Centres?

The main objective of a Business Center is to create new office locations of international standards, ensuring easy accessibility and high quality of amenities for employees, safe environment and a distinct character and image.

By combining people, space, technology and a host of value added features, Business Centres provide an efficient and professional platform for your business. Companies of all sizes approach Business Centres to reduce costs and avoid the burden of property ownership and management.

There are a host of tax issues involved when a user of a Business Centre makes a payment to the owner of the Business Centre. Most issues arise mainly on account of the fact that a business centre agreement is, nowadays, sought to be broken up into several different services. The withholding tax issues for each such service are complicated and therefore, overall, the user faces a large number of complications while trying to apply the withholding tax provisions to the payments to be made to the owner of the business centre.

Before one looks at the tax issues, it would be appropriate to first list down the standard services that a business centre provides to the user:

1. Office space – this is the basic service provided. The user gets a cabin, furniture and other assets for usage.
2. Range of communication and office tools including computers, fax, e‐mail, Dictaphones, photocopiers and scanners.
3. Global access Internet facilities
4. Videoconferencing facilities which allow the user to hold meetings with his offices and clients anywhere in the world
5. Fully automated systems with voice mail, message recording, call routing facilities
6. Customized telephone handling by professional receptionists.
7. Pantry services
8. Various sundry services like car parking , etc.

Tax Implications:

As mentioned earlier, the charges for the basic service of providing office space are nowadays sought to be broken up into charges for various amenities. An important lesson that all business centre owners need to appreciate is that the incidence of deduction of tax at source does not depend upon the nomenclature but on the nature of service provided.

The charges paid to Business Centres (whether hourly or daily or monthly charges) for use of premises, parking space and any assets would constitute rent for the purpose of taxation and the section, rates and rules applicable to rent would apply to such charges. Under section 194‐I of the Income‐tax Act, tax has to be deducted from the rent paid, by whatever name called, for hire of property. The withholding tax rates u/s 194‐I are as under:

Payments to the business centre for other services provided like courier charges, postage, stationery, photocopying, pantry charges etc. could be covered under section 194‐C which deals with payment in pursuance of a contract. Although this is not free from doubt, most people would take a conservative view and apply this section to all such payments in order to avoid penal consequences. The withholding tax rates u/s 194‐C are as under:

Thus, where a stand is taken that each invoice raised is a separate contract, the limit of Rs. 30,000 would apply and tax is required to be withheld only if that bill amount exceeds Rs. 30,000. However, where the aggregate of all such invoices of that party for the entire year (April to March) exceed Rs. 75,000 then the withholding of tax is required to be done from each invoice value.

In most cases, the business centre raises only one common invoice for all the different charges. In such cases, many business centre users prefer to take a conservative view and treat the entire invoice value as being towards rent. In such a case, tax would be withheld at the higher rate of 10%. On the other hand, if separate invoices are raised for rent and for other services or where the different service charges are clearly identified and segregated in the common invoice, then it is possible that the user may apply different rates to different payments.

Many times, it so happens that the business centre’s profitability is much lower than the 10% rate of withholding tax. This results in a situation where the business centre owner would have to claim refund of tax (since the tax deducted at source would be higher than the gross tax liability). In such situations, the business centre owner may consider the
option of obtaining a certificate from the tax authorities under section 197 directing the business centre users to make payments to the business centre at a lower rate than the rate mentioned in the respective sections dealing with withholding taxes. Upon receipt of such a certificate, the user of a business centre can make payment to the business centre after withholding tax at the rate mentioned in the said certificate. This would ease the problems faced in obtaining refunds from the tax department.

Conclusion:

The prevailing tax laws relating to withholding taxes are very stringent and harsh towards the deductor. The repercussions of non deduction or non payment of withholding tax involve attracting of penal provisions, payment of interest and also disallowance of the expense itself while computing the business income of the payer. It is for these reasons that most business centre users are very cautious while making payments to business centres. It would therefore be advisable to keep the business centre agreements as simple as possible and to avoid breaking up the charges into a large number of components.