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Journalism of Courage
The government has decided to double the rate of tax on royalties and fees for technical services earned by non-residents and foreign companies to 20 per cent from 10 per cent, as per the amended Finance Bill passed by the Lok Sabha on Friday.
According to tax experts, the surprise move to double the withholding tax rate will force companies to avail tax treaty benefits, which have high compliance burden and were so far not being utilised much as domestic rates were mostly at par with or, in some cases, higher than the respective treaty rates. The biggest hit will be in cases of payments going to companies from countries with whom India does not have a tax treaty.
“Tax treaty benefits will become more critical now to avail a reduced withholding tax rate. 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,” said Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co.
Withholding tax, or tax deduction at source (TDS), refers to the practice of tax being deducted from a payment and paid to the government by the payer and not the recipient of the payment.
India’s tax treaties with most countries, including Singapore, France, Germany, Japan, Malaysia, Luxembourg, and the UAE, have a 10 per cent tax rate on royalty and technical services income streams from India.
“With the proposed amendment to magnify the IT Act rate and the consequent amplification of delta between the treaty and IT Act rates, obtaining and maintaining the necessary documents would become paramount for foreign companies doing business in India,” said Sandeep Jhunjhjnwala, Partner, Nangia Andersen LLP.
Jhunjhjnwala added that for companies from countries like the US, UK, Philippines, and Mauritius, with whom India’s tax treaties provide for a 15 per cent tax rate for payments of royalty and technical services fees, the government’s decision comes as a “double whammy”.
“Firstly, the need to obtain the necessary documents which were hitherto not required in absence of the need to access the Treaty and secondly, the additional 5 per cent tax levy (will be there),” he said.
