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April 12, 2023

From April 1, 2023, the tax rate for FTS and royalties provided by non-residents of India quadrupled

From April 1, 2023, the tax rate for FTS and royalties provided by non-residents of India quadrupled

In India, the tax rate that non-residents must pay is typically different than the tax rate that residents must pay. The scope of Fees for technical services and royalties covers the majority of the services that India imports from other nations or from non-residents.

According to section 115A of the Income Tax Act, the tax rate in India up until this point for both of the aforementioned services rendered by non-residents was 10% plus surcharge + cess. As a result, this was seen as a very advantageous rate, and many were content to pay such tax rates in India and claim the same in their home countries, as most DTAA likewise had tax rates that, if any, were between 10-15%.

Because they would not have to file an income tax return in India if they accepted these tax rates, the non-residents were very glad to do so.

However, this tax rate has now been doubled from the previous 10% to 20% plus surcharge and cess. By virtue of the Finance Act of 2013, which the President approved on March 31, 2023, the Income Tax Department proposed this adjustment.

This modification was initially introduced on March 23, 2023, as an amendment to the Finance Bill, 2023, and it became effective on April 1, 2023. Therefore, 21.84% is the maximum tax rate that applies to non-residents for FTS and royalties.

Because of this, there was no time for non-residents to consider, plan, or strategize their services in India. Additionally, because non-residents’ tax withholding is typically at a rate where the entire tax is withheld, any payment made to a non-resident after April 1, 2023, must also be subject to the new rates.

In addition, if a person wants to take advantage of the treaty, they must present a valid Tax Residency Certificate (TRC) for India; if the TRC does not include all 5 components (Status, Nationality, UIN, Period, and Address), they must also submit Form 10F with the TRC.

Additionally, under notification 03/2022 Dt. 16.07.2022, CBDT made it essential for non-resident service providers to file Form 10F electronically on an e-filing portal. To accomplish this, they must obtain a PAN since this will be needed to register on the e-filing portal and submit Form 10F. Even though there is a relaxation from the requirement to file Form 10F electronically if you get FTS or royalty income, you still need to do so because the relaxation conditions won’t apply if the TRC is missing any information.

A non-resident corporation must file an income tax return in India after it obtains a PAN there.

There are now a number of arguments made in opposition to Form 10F or the TRC requirement, claiming that neither is necessary to receive treaty benefits under the DTAA. Another defence that some people use is that not all five details must be provided in the TRC, under subrule 2 of rule 21AB, therefore even if some are available, Form 10F is not necessary.

Therefore, taking into account all of the aforementioned facts and amendments as well as the short amount of time that the government allowed between informing the public of the change and putting it into effect, it can be said that many people will not be pleased with these changes, particularly in India where the deductor was responsible for paying the cost of tax and the government had not given a justification for raising the tax rate.

So, let’s see how much the Indian government’s initiatives, such as the first online Form 10F filing and the current double-rate FTS and royalty service, would help draw non-residents to India.

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