Increase in Tax Rate on Royalty and FTS for Non-Residents

 Following is the key points for payment of overseas Fees for technical service (FTS)

•       Section 115A(5) of the Income Tax Act, provides an exemption from filing ITR by Non-Resident subject to the condition that income is limited to interest, dividend, royalty, FTS, and TDS equal to the rate specified u/s 115A being deducted and paid.

•       Finance Act 2023 revised the rate of tax for FTS and Royalty under domestic law from 10% to 20%, which means that unless TDS deducted u/s 115A is 20%, there is no exemption from filing of ITR by NR, which will require PAN.  Please note that here surcharge & cess is applicable.

•       Hence, when non-resident opt for reduce rate as per DTAA by providing  TRC, then require to file Income tax return in India and hence must obtain India PAN.

•       Extension till 30.9.23 allowing manual filing of Form 10F, partially loses its value because filing ITR PAN, in any case, will be required. One can argue that ITR filing date is post 30.9.23 for foreign companies, true, but still, it translates that this breather is the last breather, post which limited option will be to accept higher tax or obtain PAN. 

•       In cases where electronic Form 10F is not generated, one may argue on first principles that the treaty benefit cannot be denied on grounds of procedural lapse and overriding effect of treaty. Also, in cases where the TRC contains all the prescribed information, one may not be required to furnish Form 10F itself. However, these contentions are unsettled and certainly prone to litigation. With the increase in Indian tax rate on royalty and FTS, the risk undertaken by the non-residents as well as the payers also increases significantly.

 

The unexpected doubling of rates on income of foreign companies in the nature of Royalties and Fees for Technical Services (FTS) has left taxpayers muddle headed. The applicable rate of 10 percent on income by way of Royalty and FTS earned by foreign companies from India is proposed to be enhanced to twice the rate, to 20 percent by the Finance Bill passed by the Lok Sabha, thereby intensifying the maximum effective tax rate to 21.84 percent including surcharge and cess. Taxpayers, can however continue to avail the beneficial rate, if any, under the respective Tax Treaties subject to meeting the documentation requirements such as obtaining a valid TRC from the country of residence, furnishing of Form 10F which is made online with effect from October 1, 2023. Important to note is that most Tax Treaties with India (such as Singapore, France, Germany, Japan, Malaysia, Luxembourg, UAE) provide a 10 percent tax rate on royalty and FTS income streams from India, which if compared to the hitherto IT Act rate (effective rate of 10.92 percent including surcharge and cess) provided marginal relief making Treaty benefit less lucrative when viewed from the standing of the onerous documentation requirements to claim the benefit. With the proposed amendment to magnify the IT Act rate and the consequent amplification of delta (of almost 11.84) between the Treaty and IT Act rates, obtaining and maintaining the necessary documents would become paramount for foreign companies doing business in India.

Companies’ resident in countries such as USA, UK, Philippines, Mauritius which provide for a 15 percent rate on Royalty/ FTS, which hitherto endured the lower rate of 10 percent under the provisions of the IT Act without the need to access the Treaty, would also be distressed with a double whammy. Firstly, the need to obtain the necessary documents which were hitherto not required in absence of the need to access the Treaty and secondly, the additional 5 percent (4.08 percent to be precise) tax levy.

The CBDT vide notification dated March 28, 2023  had exempted non-residents not having PAN or not required to have PAN from the mandatory electronic filing of Form 10F till September 30, 2023. With the new amendment and the time period lapsing in a few months coupled with practical challenges around electronic filing of Form 10F, taxpayers are going to find it challenging to be fully seasoned for the new tax rates and the tagged documentation rigors, even if gears are shifted to the cruise mode.