MUMBAI: The Finance Bill passed by the Lok Sabha on Friday has increased the withholding tax rate under the Income Tax (IT) Act on royalties and technical services fees (AGV) to non-resident entities from 10% to 20%.
Indian affiliates remit significant sums in royalties or FTS to their overseas parent or affiliate for use of the global brand or below License Agreements for technical know-how. Even Indian companies make such payments to unrelated parties when, for example, acquiring license rights.
If such a payment is made, tax must be withheld, which under Indian tax law is now 20%. The cost to the Indian party could increase if they extrapolate the withholding taxes (in other words, they bear the tax costs).
Whilst the foreign company receiving the royalty or FTT revenue may opt for the lower rate prescribed in the tax treaty, this results in greater compliance obligations for both the Indian payer and the foreign recipient. For example, the royalty and FTT tax treaty under the Tax treaty between India and Singapore is 10% and that under the India-US tax treaty is normally 15%.
Associated partner of EY-India Sheetal Shah said: “Foreign companies earning royalties or FTS were not required to file tax returns in India if the income is subject to tax at a rate not lower than that set out in Section 115A. If the domestic tax rate is increased to 20%, foreign companies would be able to fall back on the lower tax rates prescribed in the respective double taxation treaties. This will result in improved compliance for them, e.g. B. Obtaining PAN, Filing Tax Returns in India, Obtaining Tax Residence Certificates for Claiming Tax Treaty Benefits, etc.
KPMG India Partner & National Head (BFSI – Tax) Sunil Badala agreed that while treaty provisions can be relied upon to reduce the tax burden, a relatively simple compliance provision would tend to be complicated as additional checks of treaty eligibility would be required to be checked .
Shah pointed out that from a risk mitigation perspective, it is likely that the Indian payer will also want to contact the tax authorities for a lower withholding order.
Indian affiliates remit significant sums in royalties or FTS to their overseas parent or affiliate for use of the global brand or below License Agreements for technical know-how. Even Indian companies make such payments to unrelated parties when, for example, acquiring license rights.
If such a payment is made, tax must be withheld, which under Indian tax law is now 20%. The cost to the Indian party could increase if they extrapolate the withholding taxes (in other words, they bear the tax costs).
Whilst the foreign company receiving the royalty or FTT revenue may opt for the lower rate prescribed in the tax treaty, this results in greater compliance obligations for both the Indian payer and the foreign recipient. For example, the royalty and FTT tax treaty under the Tax treaty between India and Singapore is 10% and that under the India-US tax treaty is normally 15%.
Associated partner of EY-India Sheetal Shah said: “Foreign companies earning royalties or FTS were not required to file tax returns in India if the income is subject to tax at a rate not lower than that set out in Section 115A. If the domestic tax rate is increased to 20%, foreign companies would be able to fall back on the lower tax rates prescribed in the respective double taxation treaties. This will result in improved compliance for them, e.g. B. Obtaining PAN, Filing Tax Returns in India, Obtaining Tax Residence Certificates for Claiming Tax Treaty Benefits, etc.
KPMG India Partner & National Head (BFSI – Tax) Sunil Badala agreed that while treaty provisions can be relied upon to reduce the tax burden, a relatively simple compliance provision would tend to be complicated as additional checks of treaty eligibility would be required to be checked .
Shah pointed out that from a risk mitigation perspective, it is likely that the Indian payer will also want to contact the tax authorities for a lower withholding order.
