Domestic and Direct Tax Updates

published on 28 April 2023 I reading time approx. 2 minutes

Notifications and Circulars

1. Increase in tax rate for income earned in the nature of Royalty and Fees for Technical Services ("FTS") from 10 per cent to 20 per cent

Finance Act, 2023 has increased the tax rates under Indian domestic tax law for non–residents (NRs) earning income in the nature of Royalty or FTS from India,  from erstwhile rate of 10 per cent to 20 per cent (plus applicable surcharge and cess). The said amendment is effective from 1 April 2023.

With increase in tax rates under domestic tax laws, NRs would need to rely on lower tax rates as per Double Taxation Avoidance Agreement ('DTAA'). This would significantly reduce eligibility for exclusion from tax return compliance in India for income in the nature of royalty and FTS. This goes against government's objective of promoting ease of doing business in India. The said amendment would also impact the tax transparent entities, facing challenges in claiming DTAA benefits and may suffer higher tax rate of 20 per cent (plus applicable surcharge and cess).

For more details on the issues arising due to this change, refer to our detailed article on this topic:

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

2. NRs without Permanent Account Number ('PAN') exempt from e-filing of Form 10F up to 30 September 2023

NRs usually encounter a situation, wherein for the purpose of making a remittance to NRs, their Indian customers request them to furnish Form 10F along with other documents like a Tax Residency Certificate ('TRC'), No Permanent Establishment / Business Connection Declaration, etc.

As per notification issued last year by the Indian tax department, Form 10F was to be filed through the online mode, instead of physical copy being submitted until then.

Considering that online submission of Form 10F requires PAN and given the practical challenges faced by NRs, another Notification was issued exempting certain categories of NRs from online filing of Form 10F till 31 March 2023. This exemption is extended till 30 September 2023.

Domestic Tax Rulings

1. Maximum rate of tax deduction at source ('TDS') not to exceed TDS rate as per DTAA 

Section 206AA of the Income Tax Act, 1961 ('ITA') requires a higher rate of TDS on payments to non-residents, in the absence of a Permanent Account Number ('PAN') and other documents of the non-resident in India as prescribed i.e., TRC, Form 10F etc.

In above context, Karnataka High Court ('HC') decided in case of Wipro Ltd, that the TDS rate should be taken as per the applicable DTAA, when the recipient entity is eligible for benefit of DTAA, and not as per the provisions of section 206AA of the ITA requiring higher rate of TDS. 

2. Calcutta HC quashes assessment order not adhering to Standard Operating Procedure ('SOP') 

Tax department had issued SOP for the assessments to be made under the faceless regime. SOP provided for adherence of principles of natural justice and reasonable opportunity to be given to the taxpayer, while framing assessments under the faceless regime. The SOP also gives the format of final assessment order which sets out the various heads under which the assessment order has to be passed with due discussion.

In the subject case, taxpayer challenged the assessment order on the ground that it was in total violation of the principles of natural justice and ignored all the formalities to be observed as enumerated under the SOP for faceless assessments. The HC observed that assessing officer ('AO') passed the assessment order exactly as per show cause notice issued. The AO reproduced first 21 pages of show cause notice followed by summary of reply given by taxpayer and again the AO reproduced extract of show cause notice and determined tax liability of the taxpayer.

Noting that the AO did not follow the guidelines enumerated in the SOP laid down for framing the faceless assessment orders, the HC quashed the assessment order passed and held that the assessment order was a classical example as to how an assessment should not be made. The HC held that the AO had not adhered to the procedures enumerated in the SOP and thus reduced the procedure of framing assessments under faceless regime to an empty formality, which had to be condemned.