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Senior Advisor - Direct & International Tax
Non-residents' Payment: a Tedious Procedure
Those who have certain incomes in the nature of interest, dividends, royalties, and fees for technical services, and to earn them they do not have to set up a shop or establishment in India, have something to rejoice for because, in their case, there are no return filing obligations if taxes, as applicable u/s 115A of the Indian Income Tax Act, 1961, are being withheld on such amounts at the time of payment by the person responsible for making such payments.
The primary duty is cast upon the deductor to follow due procedure as he is obliged under the law to follow in procuring a set of documents comprising agreements, invoices, TRC, NO PE declaration, and Form 10F, and thereupon to also obtain a certificate from the practicing Chartered Accountant in Form 15CB of the rate applicable under 115A, considering the relief available under the Double Taxation Avoidance Agreement. Besides, the deduct or is required to provide a self-declaration and undertaking to make up for any shortfalls, etc. On top of that, the deductor is required to provide information on each such payment at the income tax portal on a real-time basis. This large exercise is required to make up for the relaxation given to non-residents.
When we look closely to sub-section (5) of section 115A it provides forexemption from the requirement of furnishing of return of income in case of non-residents who derive only dividend or interest income as referred to in clause (a) of sub-section (1) of said section, or royalty or FTS income of the nature specified in clause (b) of sub-section (1) of section 115A subject however to the fact that taxes are deducted thereon as per the applicable provisions of Part B of Chapter XVII of the Act which are not lower than the prescribed rates under sub-section (1) of section 115A. Section 195 proper provides for a requirement to deduct taxes on payments to non-residents as per the rates in force. Rates in force are further defined in Section 2 (37A) as follows:
(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year means—
India has signed Double Taxation Avoidance Agreements (DTAA) with major countries like Singapore, France, Italy, Japan, the United States of America, etc.
The Income Tax Act 1961 provides that where India has entered into a DTAA with countries, the provisions of the DTAA of the Income Tax Act 1961 that are more beneficial to the assessee shall apply.
The Income Tax Act of 1961 provides relief to non-resident taxpayers and foreign companies if the following conditions are satisfied:
Before April 1, 2023, as per the provisions of Section 115A of the Income Tax Act 1961, payments like fees for technical services (‘FTS’) and royalties made to non-residents or foreign companies were liable to withholding tax at 10.92% (including surcharges and education cess). However, since April 1, 2023, the rate of withholding tax has increased to 21.84% (including surcharges and education cess).
With this amendment, in several cases, the tax rates as per the DTAA are more beneficial to non-residents. However, to avail of the beneficial rates as per the DTAA, non-residents have to file Form 10F online (w.e.f. October 1, 2023). The Income Tax Department has exempted non-residents who have to file Form 10F online from applying for a PAN. Thus, Form 10F can be filed online even without the availability of a PAN. Further, while uploading Form 10F it is mandated to upload the Tax Residency Certificate (TRC).
However, when a foreign company or non-resident avails of the benefit of a DTAA, it becomes imperative for a foreign company to file it’s tax return in India. Therefore, this is in complete contradiction to the move by the Income Tax Department regarding the non-requirement of PAN by a foreign company.
Hence, accordingly, with the revision in the rates of withholding taxes under the Income Tax Act 1961, since the provision of the DTAA would be more beneficial to the taxpayer, foreign companies would be mandated to file tax returns in India.
