Increase in Tax Rate on Royalty and Fee for Technical Services
In the case of non-residents, India-source income is taxable in India only to the extent that such income accrues or arises, is deemed to accrue or arise, or is received or deemed to be received in India. Accordingly, where income in the nature of royalty or fee for technical services (FTS) is deemed to accrue or arise in India, such income becomes taxable in the hands of the non-resident in India. Section 115A of the Income Tax Act, 1961 prescribes the tax rates applicable to certain streams of income earned by non-residents. From a broader taxation perspective, the amendment to this section is significant for cross-border payees as well as Indian businesses making royalty or FTS payments.
What changed under Section 115A?
Before the amendment, royalty and FTS income earned by non-residents was taxable under Section 115A at the rate of 10%. With effect from 1 April 2023, this rate has been increased to 20%. The effective rate is therefore 20% plus applicable surcharge and 4% health and education cess.
This increase materially changes the tax position for non-residents earning royalty or fee for technical services from India, particularly in cases where tax treaty relief was previously not being evaluated because the domestic tax rate was already equal to or lower than the treaty rate.
Tax treaty benefit for royalty and FTS income
The income of a non-resident is taxable either under the provisions of the Income Tax Act or the relevant tax treaty entered into between India and the country of residence of the taxpayer, whichever is more beneficial. As a result, non-residents receiving royalty or FTS from India must now revisit whether the tax rate available under an applicable treaty is more beneficial than the amended rate under Section 115A.
In practice, this change increases the relevance of treaty-based review and may require a more careful assessment of withholding positions, especially where Indian payers are making recurring payments under licensing, technical service, or cross-border support arrangements. This is also closely connected to broader international tax services considerations for non-resident taxpayers.
Documents required to claim treaty benefit
To claim a beneficial rate under an applicable tax treaty, the non-resident is generally required to furnish the following:
- a valid Tax Residency Certificate (TRC) issued by the government of the country of residence
- Form 10F as a self-declaration
- supporting records to establish beneficial ownership of the income
Accordingly, treaty relief is not merely a rate comparison exercise. It also involves documentation readiness and procedural compliance, including the requirements generally associated with direct tax and cross-border withholding positions.
Impact on return filing and compliance cost
Section 115A provides relief from filing an income-tax return in India where the non-resident has only royalty or FTS income from India and tax has been deducted at source at the rate prescribed under Section 115A. However, after the increase in the domestic tax rate, a non-resident may choose to claim a lower treaty rate where available. In such cases, the exemption from filing an Indian income-tax return under Section 115A may no longer be available.
This creates an important practical consequence. While the treaty route may reduce withholding tax exposure, it may also lead to additional return filing obligations, documentation review, and related compliance costs. Therefore, a proper cost-benefit analysis becomes necessary before deciding whether to rely on treaty provisions.
Practical takeaway for non-residents and Indian payers
The increase in tax rate on royalty and FTS income means that non-residents can no longer assume that the domestic rate under Section 115A will remain the most efficient route in all cases. Indian payers and non-resident recipients should now reassess:
- whether treaty relief is available and beneficial
- whether TRC, Form 10F, and beneficial ownership documents are in place
- whether lower withholding justifies the additional return filing and compliance burden
- whether the payment structure needs review from a wider corporate tax services and cross-border compliance perspective
Last updated: 11/05/2023
Article contributed by:
Senior Manager, Taxation Advisory & Compliance Services