As per the provisions of the Income Tax Act 1961 (‘ITA’), the income of a non–resident is taxable in India only to the extent such income
Payments made to a non–resident in the form of fees for technical services/royalties are subject to tax in India & hence taxes were withheld at the time of making such payment section The rates of deduction of taxes have been specified in section 115A of the ITA.
The Finance Bill 2023 was announced by Hon’ble Finance Minister Nirmala Sitharaman in February 2023. However, subsequently, certain amendments were made to the original Bill which was also passed by the Parliament.
The Finance Bill 2023 made an amendment to section 115A of the ITA. The tax rate on royalties and fees for technical services (FTS) has been increased from 10% to 20%. This amendment is effective 1st April 2023. Thus, any payment made to a non–resident in the nature of royalties/ fees for technical services shall be subject to withholding tax at 20% (as increased by cess & surcharge).
Section 115A had exempted taxpayers from filing their tax returns in India provided that:
Thus, non–resident taxpayers were exempted from filing their tax returns if the conditions of section 115A were satisfied. This also meant that they need not obtain a Permanent Account Number (‘PAN’).
Section 90(2) of the ITA provided that taxpayers have the option to pay taxes as per the Double Taxation Avoidance Agreements (‘DTAA’) or the ITA whichever was more beneficial to them.
However, with the revised section 115A amending the tax rate to 20% on FTS & royalty, the tax rates as per the DTAAs would be more beneficial to taxpayersection When a non–resident taxpayer opts to deduct taxes as per the DTAA certain additional documents would be required to be furnished which are as follows:
The Central Board of Direct Taxes (‘CBDT’) had notified that non–resident taxpayers were required to electronically file Form 10F. However, considering that non–residents do not have a PAN in India, the CBDT, this requirement has been extended till 30th September 2023. However, considering that taxpayers would opt for lower tax rates as per the DTAA, they would have to mandatorily obtain the PAN in order to submit form 10F electronically.
Further, taxpayers opting for the beneficial tax rates as per the DTAA would also be required to file their tax returns in India.
Apart from increasing the tax burden, the amendment to section 115A would also increase the compliance burden on non–resident taxpayers which would include
Another impact could also be on resident tax deductors wherein the royalty & FTS payments are being grossed up.