When it comes to income earned by non-residents from royalty and fees for technical services in India, whether the same shall be taxed as well as the rate of taxation shall be determined as per the provisions of the Income Tax Act, 1961. However, recently, the withholding tax on income from royalties and fees for technical services earned by non-residents has been increased.
With effect from 1 April 2023, the withholding tax rate has been increased under the Finance Act 2023 by 100%, i.e., from the previous 10% to 20%. An additional surcharge and education cess shall be added to the tax payable by such individuals as well.
Entities like non-residents and foreign companies are taxed only on the income they have earned in India. As such, income earned as royalties or fees for any technical services shall be considered to have originated in India and, therefore, taxable in India.
Provisions under Section 115A of the Income Tax Act, 1961 state the various tax rates at which income in the hands of non-residents or foreign companies shall be taxed. The Finance Act, 2015 had reduced the withholding tax rate on income from royalties and fees for technical services from the 25% mark to 10%. However, the Finance Act, 2023, increased this figure back to 20%, plus has added surcharge and education cess.
Taxation as per Tax Treaties
Tax treaties between countries offer several benefits, including lowering the tax rates on royalties and fees for technical services if the receiving party is a beneficial owner. This allows non-residents and foreign companies to choose whether they want to be taxed as per the provisions of the tax treaty India has with their country or in accordance with the Income Tax Act of India, whichever is more suitable for them.
However, to claim any benefits under a tax treaty, non-residents and foreign companies must provide a valid tax residence certificate (TRC) that has been issued by the government of their country of residence. The Central Board of Direct Taxation (CBDT) through Circular 789 clarified that a TRC shall be considered as ample evidence to accept the residential status and beneficial ownership when determining if the provisions of a tax treaty are applicable.
In cases where non-residents/foreign companies are from a country that has a tax treaty with a rate of more than 10% or that does not have any tax treaty with India at all, the recent change in the rate of taxation may create some additional burden.
Withholding tax for income from royalties and fees for technical services may be paid by non-residents/foreign companies at a lower rate that is in accordance with an applicable tax treaty. This, however, also means that non-residents and foreign companies are no longer exempted from filing an income tax return (ITR) and shall be required to do so hereafter.
Permanent Account Number (PAN)
Non-residents and foreign companies may have to obtain a Permanent Account Number (PAN) in India to meet compliance requirements.
Note: There is a temporary relaxation on obtaining PAN till 30 September 2023.
Effect on Non-Residents
Considering that the withholding tax rate on royalties and fees for technical services has been increased from 1 April 2023, it is imperative to take the following scenarios and their implication on taxes into consideration:
|
S. No. |
Tax Treaty Rate |
Domestic Rate |
Beneficial |
TRC & Form 10F |
PAN |
Annual Filing |
|
1 |
10% |
21.84% |
Tax Treaty |
Required |
Required |
Required |
|
2 |
15% |
21.84% |
Tax Treaty |
Required |
Required |
Required |
|
3 |
20% |
21.84% |
Tax Treaty |
Required |
Required |
Required |
|
4 |
No Tax Treaty |
21.84% |
Domestic |
Not Required |
Not Required |
Not Required |
Conclusion
The majority of tax treaties that India has signed with other countries limit this tax rate to 10% (inclusive of surcharge and cess), considering the recipient fulfills the ‘beneficial ownership’ criteria mentioned therein.
However, in some tax treaties, like that between India and US, where the tax rate on royalties and fees for technical services is more than 10%, there is a choice to apply the provisions under the Income Tax Act, 1961, if it proves to be more beneficial.
Non-residents and foreign companies that avail of the
incredible tax rate on royalties or fees for technical services under any tax
treaty must obtain tax registration in India, timely file ITRs in India and
ensure they comply with all the requirements to claim such benefits.
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