The government has doubled the withholding tax rate on royalties and fees for technical services earned by non-resident companies to 20% from 10%. The change has been brought about through the amendments made to the Finance Bill, 2023 by finance minister Nirmala Sitharaman on Friday.
While many companies are covered by double taxation avoidance agreements, under which they would get the beneficial tax rate of 10-15%, experts said it would lead to a higher compliance burden, as they would still require the tax residency certificate and related documentation from the foreign firm to avail the tax benefit.
The withholding tax is usually paid by the Indian company and India Inc is still weighing out the impact of the move on their policies. “The rate under the Income Tax Act has been increased to 20%. However, under the tax treaty, the rate would continue to be 10%. There will not be any impact on the company,” said a senior executive of an automobile firm.
The move has also puzzled experts who pointed out that the tax rate had been gradually reduced from 30% to 10% over the years.
Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, said the maximum effective tax rate would now be at 21.84% including surcharge and cess. “Taxpayers can however continue to avail the beneficial rate, if any, under the respective tax treaties, subject to meeting the documentation requirements such as obtaining a valid TRC from the country of residence, furnishing of Form 10F which is made online with effect from April 1, 2023,” he said.
Most tax treaties with India such as those of Singapore, France, Germany, Japan, Malaysia, Luxembourg and the UAE provide a 10% tax rate on royalty and fees on technical income streams from India, which if compared to the hitherto IT Act rate (effective rate of 10.92% including surcharge and cess), provided marginal relief. This made the treaty benefit less lucrative when viewed from the onerous documentation requirements to claim the benefit, he noted.
The move could also increase the cost of import of technology in cases where Indian companies are grossing up withholding taxes and treaty benefits are not available, said Gouri Puri, partner, Shardul Amarchand Mangaldas & Co. “Tax treaty benefits will become more critical now to avail a reduced withholding tax rate. Foreign entities will need to evaluate their commercial substance to be able to claim such treaty benefits,” she said.