India: Increase in tax rate for income earned in the nature of Royalty and Fees for Technical Services

published on 31 March 2023 | reading time approx. 3 minutes

The tax rate for income earned in the nature of Royalty and Fees for Technical Services is increased from 10 to 20 per cent under the Indian Domestic Tax law – from the Indian Financial Year 2023-24 (i.e., 1 April 2023).

Like every year, the Indian Finance Minister had placed the Finance Bill, 2023 before the Indian Parliament on 1 February 2023 inter-alia containing various provisions related to direct taxes amendment. While the budget was at discussion stage at lower house of Parliament (Lok Sabha), the government has inserted an additional amendment providing that the tax rate for income earned in the nature of Royalty and Fees for Technical Services from India shall be taxed at 20 per cent (plus surcharge and cess) from erstwhile 10 per cent (plus surcharge and cess).

The tax rate under the Indian domestic tax law for Royalty and Fees for Technical Services, with the said change will now become at par with income earned in the nature of Interest (except certain categories where Interest is taxable at concessional rates) and Dividend in India and the said amendment would be applicable from Financial year 2023-24 onwards i.e. 1 April 2023.

The non-resident taxpayer who are eligible to claim the benefit of Double Taxation Avoidance Agreement (DTAA or Tax Treaty) would be subject to lower tax rate (generally, 10 per cent or 15 per cent) provided under the DTAAs with India. However, in order to claim the beneficial tax rate as per the respective DTAA, non–resident would need to obtain Tax Residency Certificate (TRC). If such TRC does not contain all the requisite information (like tax identification number, period, address, etc.) as required by the Indian domestic tax law, then non-resident will also need to furnish electronic Form 10F. In order to file online Form 10F, a taxpayer require a tax registration in India viz. Permanent Account Number (PAN). Where withholding tax is done as per tax treaty rates (and not rate provided under the Indian domestic tax law), relaxation provided to non – resident from filing corporate tax return in India would not be available.

Thus, below additional compliance may have to be considered:

Apply for Tax Registration in India/Permanent Account Number (PAN)
Obtaining a TRC from the respective tax authorities
Obtain Form 10F online from the Income Tax Portal (if required).
Filing of Tax Return in India
Obtain Digital Signature Certificate (DSC) to obtain Form 10F online/file Tax Return in India.

More importantly, the said amendment would impact the tax transparent entities, who are not liable to tax in their home countries and are not able to obtain the valid Tax Residency Certificate. The DTAA eligibility for such entities are often challenged and is litigative and in such a case, tax authority could apply 20 per cent (plus surcharge and cess).

Owing to above, it is important for taxpayer to analyse the tax position for India with respect to obtaining of tax registration and undertaking necessary tax compliance to avoid unnecessary tax challenges in India. Careful analysis would be required if the income recipient is tax transparent entity (for e.g., GmbH & Co KG or KG of Germany).

Requirement of obtaining online Form 10F is deferred until 30 September 2023 for non-resident who do not have PAN and are not required to have PAN in India. Hence, PAN may not be immediately required for limited purpose of 10F, though PAN may still be required for ROI filing.