In India the tax rate applicable for non-residents are different from the tax rate applicable for residents in most of the cases. The major services which India import from foreign countries or from non-residents is covered under the ambit of Fees for technical services and royalty.
Till now, the tax rate in India for both the above services provided by non-resident was 10%+surcharge+cess under section 115A of the Income tax act. Thus, this was considered as a very beneficial rate and people were happy paying such tax rates in India and taking credit for same in their residence country, as most of the DTAA also the tax rate, if any was between 10-15%.
Hence, the non-residents were very happy with accepting such tax rates because if they accept such tax rates they would not be required to file any income tax return in India.
However, this tax rate has now been increased to 20%+surcharge+cess which is double than what it was before. This amendment has been brought by Income tax department by virtue of Finance Act, 2023 which got it’s assent from President on 31st March, 2023.
This change was first introduced with amendment to Finance Bill, 2023 on 23rd March 2023 and has been made applicable from 01.04.2023. Thus, the highest tax rate applicable for non-resident for FTS and royalty is 21.84%.
Hence, there was no time given for non-resident to think, plan or strategize their services in India and in case of non-residents their tax withholding is also mostly at a tax rate so that entire tax is withheld and therefore any payment made to non-resident after 01.04.2023 tax needs to be withheld on same at these new rates.
Further, if a person wishes to take benefit of the treaty they need to provide a valid Tax residency certificate in India and if the tax residency certificate does not contain all the 5 components i.e. Status, Nationality, UIN, Period, Address then they have to file Form 10F along with such TRC.
Further, vide notification 03/2022 Dt. 16.07.2022, CBDT made it mandatory to e-filing Form 10F mandatory on e-filing portal by the non-resident service provider and to do that they have take PAN as same will be required for registering on e-filing portal and in turn file Form 10F. Although a relaxation was provided from e-filing of Form 10F however, if you are earning FTS or royalty income you will have to file Form 10F online on e-filing portal if the TRC does not have all details as it won’t be covered with the relaxation conditions.
Once a non-resident company takes PAN in India it will also have to file Income tax return in India.
Now, there are various defenses against requirement of TRC or Form 10F stating that TRC is not mandatory as DTAA to take treaty benefit. Further, there is one more defense which people are taking stating that as per sub rule 2 of rule 21AB not all the 5 details are mandatory in TRC, thus even if some details are available Form 10F will not be required.
Hence, considering all the above facts and amendments and the less time which has been given by the government between informing such change to people and implementing it, it can be said that many people will not be happy with such changes especially where deductor was bearing the cost of tax in India and also no reason has been provided by government for increasing such tax rate.
Thus, let’s see how such steps of India government will attract non-residents to India i.e. first online filing of Form 10F and now double rate for FTS and royalty service.
Guidance on above article for Indian Income Tax by:
Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo
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