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MUMBAI: The Finance Bill passed by the Lok Sabha on Friday has increased the withholding tax rate under the Income Tax (I-T) Act on royalties and fees for technical services (FTS) paid to non-resident entities from 10% to 20%.
Indian subsidiaries remit significant sums as royalty or FTS to their overseas parent or affiliate entity for use of the global brand or under licensing agreements for technical knowhow. Even Indian companies make such payments to non-affiliate parties when they procure, say, licensing rights.
When such payment is made, tax is required to be withheld, which now stands at 20% under India’s domestic tax law. The costs for the Indian party could go up if they are grossing up the withholding taxes (in other words, they are bearing the tax cost).
While the foreign entity that is receiving the royalty or FTS income can opt for the lower rate prescribed in the tax treaty, it will result in greater compliance obligations for both the Indian payer and foreign recipient. For instance, the tax treaty on royalty and FTS under the India-Singapore tax treaty is 10%, and that under the India-US tax treaty is typically 15%.
EY-India associate partner Sheetal Shah said, “Foreign companies earning royalty or FTS were not required to file tax returns in India if the income was subject to tax at a rate not lower than that specified in section 115A. With increase in the domestic tax rate to 20%, foreign entities are likely to fall back on the lower rates prescribed in the respective tax treaties. This will result in increased compliance for them, such as obtaining PAN, filing tax returns in India, obtaining tax residency certificates for claiming tax treaty benefits, et al.”
KPMG India partner & national head (BFSI – tax) Sunil Badala agreed that, while treaty provisions can be resorted to, in order to reduce the tax burden, a relatively simple compliance provision would tend to get complicated as additional checks for treaty entitlement would have to be examined.
Shah pointed out that from a risk-mitigation perspective, it is likely that the Indian payer may also want to approach tax authorities to obtain a lower withholding tax order.
Indian subsidiaries remit significant sums as royalty or FTS to their overseas parent or affiliate entity for use of the global brand or under licensing agreements for technical knowhow. Even Indian companies make such payments to non-affiliate parties when they procure, say, licensing rights.
When such payment is made, tax is required to be withheld, which now stands at 20% under India’s domestic tax law. The costs for the Indian party could go up if they are grossing up the withholding taxes (in other words, they are bearing the tax cost).
While the foreign entity that is receiving the royalty or FTS income can opt for the lower rate prescribed in the tax treaty, it will result in greater compliance obligations for both the Indian payer and foreign recipient. For instance, the tax treaty on royalty and FTS under the India-Singapore tax treaty is 10%, and that under the India-US tax treaty is typically 15%.
EY-India associate partner Sheetal Shah said, “Foreign companies earning royalty or FTS were not required to file tax returns in India if the income was subject to tax at a rate not lower than that specified in section 115A. With increase in the domestic tax rate to 20%, foreign entities are likely to fall back on the lower rates prescribed in the respective tax treaties. This will result in increased compliance for them, such as obtaining PAN, filing tax returns in India, obtaining tax residency certificates for claiming tax treaty benefits, et al.”
KPMG India partner & national head (BFSI – tax) Sunil Badala agreed that, while treaty provisions can be resorted to, in order to reduce the tax burden, a relatively simple compliance provision would tend to get complicated as additional checks for treaty entitlement would have to be examined.
Shah pointed out that from a risk-mitigation perspective, it is likely that the Indian payer may also want to approach tax authorities to obtain a lower withholding tax order.
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