As published on financialexpress.com, Wednesday 3 May, 2023.
India recently amended its local tax laws by amending the Finance Bill. One of the noteworthy changes included increasing the withholding tax rate for Royalty and FTS earned by Non-Residents/Foreign Companies.
With the amendment, the tax rate on royalty and FTS rose from 10.92% to 21.84% (including surcharge and cess), effective April 1, 2023. This move will likely see non-residents and foreign companies availing tax treaty benefits, as the treaty rates would now be more beneficial to them.
Indian local laws provide relief from filing tax returns in India if the following conditions are satisfied.
Further, Indian Tax Laws provide that where India has entered into a double tax avoidance agreement (DTAA) with other countries, the provisions of the Act shall apply only if they are beneficial. As a result, provisions of the DTAA shall prevail over the provisions of the Act if the same is more beneficial. Currently, many Tax Treaties signed by India with countries like the United States of America, the United Kingdom, and others prescribe a higher tax rate of 15% for Royalty and FTS. Further, many other Treaties with countries like Germany, Singapore, and France provide a tax rate of 10%.
Based on this, non-residents from countries where the tax rate was 15% were opting to be governed by local Indian laws. Also, for non-residents in the case of countries where the tax rate was 10%, where opting to be governed by Indian local laws as it provided relaxation from filing a tax return in India as the differential cost was only 0.92% (10.92% v 10%).
The new amendments will now compel non-residents/foreign companies to avail of the tax treaty benefits, as the treaty rates would now be more beneficial than the earlier scenario.
For Non-Resident/Foreign Companies to avail of Tax Treaty Benefits, Indian law requires them to submit a Tax Residency Certificate (TRC) and other declarations. However, where the TRC does not contain all the details required by Indian Laws, they must submit an additional form known as Form 10F along with the TRC.
It would also be pertinent to note that the Central Board of Direct Taxes (CBDT) in India recently mandated the electronic filing of Form 10F by non-residents. The CBDT also provided temporary relief for non-residents not having a Permanent Account Number (‘PAN’) (i.e. Indian Tax Registration Number) in India to furnish Form 10F manually but only till March 31 2023 (now extended till September 30 2023). Given the same, it becomes critical for Non-Residents/Foreign Companies to submit all the relevant documents, including Form 10F, electronically to avail of the beneficial tax rates under the Tax Treaty.
These amendments would now require Non-Residents/Foreign Companies to obtain PAN in India and submit appropriate documents to avail of Tax Treaty benefits. To submit Form 10F electronically, these companies must create an online account on the Government portal that requires a PAN. These changes would indirectly force all Non-residents looking to avail of tax treaty benefits to obtain a PAN.
In addition to the above, as per Indian Tax Laws, every company must file a tax return in India. From a Foreign Company perspective, logically, every company earning income from India should be liable to file a tax return in India. Accordingly, once the Foreign Companies have a PAN in India and earning income from India or availing Tax Treaty benefits from India, they would be obliged to file a tax return in India. Further, the exemption for filing tax returns would no longer be available as the taxes would have been withheld as per the Tax Treaty and not as per local laws of India. Also, transfer pricing compliances would have to be carried out in India in the case of related party transactions.
Foreign Companies/Non-Resident earning income from India would have to evaluate the tax impact in India on account of the amendments in India. Also, companies would have to analyse the eligibility to avail of Tax Treaty benefits, including looking through the beneficial ownership test, substance test, etc. Once the eligibility is clear, they must obtain appropriate registration in India and all the compliances are carried out in India.