Govt hikes tax on royalty, technical fees to non-residents
"This increase in rate will lead to a higher tax rate of withholding tax obligations on payments to be made to non-residents," said Saurrav Sood, Practice Leader, International Taxation at SW India.
Published: 24th March 2023 03:42 PM | Last Updated: 24th March 2023 03:42 PM | A+A A-
Image used for representational purpose only. (Photo | R Satish Babu, EPS)
MUMBAI: The government has hiked the tax on royalties and fees from technical services earned by non-resident companies from 10 to 20 per cent. The hike in tax on royalty was one of the amendments proposed in ‘The Finance Bill, 2023’ which was tabled in the lower house by the Union Finance Minister Nirmala Sitharaman on Friday. The Finance Bill, 2023, which contains various proposals related to taxation and government spending, was passed with several amendments and 20 more Sections have been added to the Bill.
“In a surprise move, the Government has increased the withholding tax rate on royalties and fees for technical services paid to non-residents from 10% to 20% under India’s domestic tax law. Tax treaty benefits will become more critical now to avail a reduced withholding tax rate,” said Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co. “Foreign entities will need to evaluate their commercial substance to be able to claim such treaty benefits. This may also increase the cost of import of technology in cases where Indian companies are grossing up withholding taxes and treaty benefits are not available,” Puri added.
Royalty is any payment made where the original property’s rights are retained by the owner and the right to use is licensed out to the user.
“This increase in rate will lead to a higher tax rate of withholding tax obligations on payments to be made to non-residents unless there is a tax treaty benefit which reduces such rate,” said Saurrav Sood, Practice Leader International Taxation at SW India.
In a typical example of payments made to US companies, the rate of withholding tax on royalty and fees for technical services under the tax treaty was 15%, however, Indian companies while making such payments used to take benefit of a lower rate as per the domestic tax act said Sood.
“Now, when such rate under the domestic tax act has been increased to 20%, the similar benefit shall not be available. Further, even if tax treaty benefit is availed when a non-resident will file their income tax return in India, the differential tax will be required to be paid at the time of filing of return of income,” he added.
