Increase in tax rate on Royalty or Fee for technical services
May 09, 2023
In the case of Non-residents (NRs), India-source income is taxable only to the extent that such income accrues or arises or is deemed to accrue or arise in India or is received or deemed to be received in India. If Income in the nature of Royalty or Fee for technical services (FTS) is deemed to accrue arise in India, therefore, such income would get taxable in the hands of NRs in India. Section 115A of the Income Tax Act, 1961 (Act) provides for the rates at which different streams of income are taxable in the hands of NR. As per pre-amended Section 115A of the Act, rate of tax on Royalty / FTS was taxable at the rate of 10% in the hands of NR. Post amendment with effect from April 01, 2023, the rate of tax has been increased for Royalty / FTS income earned by NRs from 10% to 20%. The effective tax rate is 20% plus a surcharge (if applicable) plus an education cess.
The income of NR is taxed as per the provisions of the tax treaty (between India and the country of residence of the taxpayer) or the Income Tax Act, 1961 (Act), whichever is more beneficial. In order to claim benefit under a tax treaty, an NR is required to furnish a valid Tax residency certificate (“TRC”) issued by the government of its country of residence, Form 10F (self-declaration), and proof to substantiate the beneficial ownership of income.
Pre-amendment, the tax rate of 10% as per Section 115A of the Act was equal to or less than the tax rate provided under the majority of tax treaties entered by India, resulting in non- availment of treaty provisions and payment of taxes as per Section 115A of the Act. Accordingly, due to changes in tax rates NRs have to revisit their position to check in case if it is beneficial to claim the tax rate provided under tax treaties entered by India with the countries of which such NRs are resident. However, a cost-benefit analysis shall be required to be done due to increased compliance costs, if any.
Section 115A of the Act exempts NRs from filing income-tax returns in India provided (i) NR had Royalty / FTS income only from India and (ii) tax has been deducted at source at a rate given under section 115A of the Act. Post amendment, in tax rate under section 115A of the Act, NRs may opt for lower withholding by claiming treaty benefits, if any, and exemption from filing income-tax returns under section 115A of the Act shall not be available in such cases. This may result in increased compliance costs.
Last updated: 11/05/2023
Article contributed by:
Senior Manager- Taxation Advisory & Compliance Services
