Indian Union Budget 2023 - Doubling of tax on Royalty and Fees for Technical Services

The Union Budget for 2023-24 received assent of the President of India on 31^st March 2023. While most of the changes proposed in the finance bill laid before the parliament on 01^st Feb 2023 have been accepted, a total of 64 additional amendments to the initially proposed Finance Bill on 01^st February 2023 also formed part of the bill that was passed in the parliament and laid before the President for final assent. Out of these 64 amendments, one of the key amendments impacting non-residents/ foreign companies (not having a permanent establishment in India) is the doubling of withholding tax rate on royalties and fees for technical services (‘FTS’) from the existing 10% to 20%, plus surcharge and cess.

It is an accepted fact that Indian multinationals imports technology and high-end services from foreign jurisdictions and pay royalties and FTS for the use of technologies. Section 115A provides a non obstante clause by which the Income of the nature of royalty and FTS is considered to have arisen in India even if the Foreign Company or a non-resident does not have any place of business in India. Thus, section 115A gives paramount importance to the source rule of taxes. By virtue of this, withholding tax obligations arise in the hands of the Indian payer while remitting any sums which qualify as royalty or FTS. It is undisputed that the non-resident/ foreign company has the option to be taxed as per the provisions of Double Tax Avoidance Treaty (‘DTAA’) entered into between India and the country of residence of the non-resident/ foreign company or the Income-tax Act, whichever is more beneficial.

Upto 31^st March 2023, section 115A provides that tax at the rate of 10% shall be levied on royalty and FTS received by Foreign Companies from India. This rate was in line with the rate prescribed by most of the Tax Treaties. Now with the increase in domestic withholding tax rate to 20% (plus surcharge and cess), there will be an additional tax burden on non-residents/ foreign companies from countries where the DTAA rate is higher than 10%.

In addition to the increase in withholding tax rates, additional compliances are required to be undertaken by non-residents/ foreign companies in order to claim a beneficial tax rate under the respective DTAA. This includes obtaining a Tax Residency Certificate (TRC) from the country of residence and such TRC should contain the requisite information (such as tax identification number, residency period, address, etc.) as prescribed by the India Income Tax Rules. The non-resident/ foreign company is also required to furnish Form 10F to the Indian payer to disclose the aforementioned details. Accordingly, to adopt a lower rate under the DTAA, greater compliance obligations arise for both Indian payers as well as foreign recipients. A non-resident/ foreign company choosing to adopt the DTAA tax rate are required to undertake the following compliances from an Indian Income tax perspective:

• Obtaining a Permanent Account Number (PAN) from Indian tax authorities
• Obtaining a TRC from the respective tax authorities in the resident jurisdiction
• Filing Form 10F electronically on the India Income Tax Portal. (Format as per Appendix).
• Filing an Income Tax Return in India
• Obtaining Digital Signature Certificate (DSC) to file Form 10F online/ file Tax Return in India.
• Issuing a ‘No Permanent Establishment’ declaration to the Indian paying entity (Format as per Appendix).

To summarise, in the case of non-residents/ foreign companies, where the tax treaty provides for a rate higher than 10 percent or in case India does not have a tax treaty with the recipient’s jurisdiction, the change will result in an additional tax burden.

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Appendix-I

Declaration of no PE in India

Declaration required u/s 9 of Income Tax Act, and for claiming relief under an agreement referred to in section 90 and 90A i.e. (for claiming the benefit of DTAA - Double Tax Avoidance Treaties)

To,

_____________________

_____________________

Declaration : No PE in India

Sir,

The Following letter is given to satisfy your country's income tax law requirements.

In terms of requirements of Indian Income tax Act and Rules, we wish to clarify that

1. We are a company based in _______________________ (Country).
2. The income from business with you is taxable in ______________________. We are a regular Income tax assessee in our country as per our rules. Our Income Tax Registration number in our country is _____________.
3. We do not have any Permanent Establishment in India [either through self or agent], (as defined under the Section 92F(iiia) of the Income Tax Act).
4. Hence, we affirm that our income neither accrues in India, nor arises in India, from a Permanent Establishment / Business Connection in India.
5. We shall hold you indemnified, if in future, anything is found contrary to the above and your company faces any issues in Indian income taxes for non-deduction of tax.

For __________________

Name: __________

Designation:    __________

Address:          __________

Appendix-II

FORM NO. 10F

[See sub-rule (1) of rule 21AB]

Information to be provided under sub-section (5) of section 90 or sub-section (5) of section 90A of the Income-tax Act, 1961

I____________*son/daughter   of   Shri ____________ in   the   capacity   of ____________  (designation) do provide the following information, relevant   to   the   previous    year____________ *in   my   case/in   the   case of          for the purposes of sub-section (5) of *section 90/section 90A:—

2. I have obtained a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A from the Government of ____________ (name of country or specified territory outside India)