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Income Tax Update/2023-24/01

SNR Income Tax Update

Issue: 01/2023-24

The Union Budget for 2023-24 received the 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 01st Feb 2023 have been accepted, a total of 64 additional amendments to the initially proposed Finance Bill on 01st 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 import 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. At the same time, it must also be noted that the non-residents/foreign companies do have the option to be taxed either as per the provisions of the 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 for them.

Upto 31 st March 2023, section 115A provided 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 the 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 this, with the increase in tax rates as per the Indian Income Tax Act, non-residents/ foreign companies willing to be taxed at lower tax rate by availing the benefits of DTAA shall have to undertake additional compliances that shall
include but not limited to the following:

  • Obtaining a Permanent Account Number (PAN) in India.
  • Obtaining a TRC from their resident jurisdictional authorities.
  • Furnishing Form 10F electronically. (Appendix-I).
  • Filing an Income Tax Returns in India.
  • Issuing a ‘No Permanent Establishment’ declaration to the Indian entity (Appendix-II).

Thus, this increase in tax rates shall have an impact on the non-residents/ foreign companies governed by DTAAs prescribing a rate higher than 10% as well as those non-residents/ foreign companies located in tax jurisdiction with which India does not have a tax treaty……..Read more


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