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    ARTICLE - India

    India’s Finance Act 2023: Royalties and FTS for Non-Residents

    03 Mar

    India Finance Act 2023 - Introduction

    In a significant move to adjust its tax framework, the Finance Act 2023 introduced an amendment that impacts non-residents receiving royalty and fees for technical services (FTS) in India. Since its inception in 1974, the Income Tax Act 1961 has undergone numerous revisions, with the latest changes set to influence multinational corporations and their operations within India.

    Historical Context and Recent Amendments

    Previously, the tax rate for royalty and FTS received by non-residents was set at 10% (plus applicable surcharge and cess), as outlined in Section 115A of the Act. This rate was momentarily increased to 25% in 2013 before being restored to 10% in 2015. However, the Finance Act 2023 has now doubled this rate to 20% (plus surcharge and cess), effective from 1 April 2023.

    Implications for Non-Residents

    The increase in the tax rate to 20% presents a significant shift for non-residents deriving income from royalty and FTS in India. Given that many tax treaties with countries such as the United Kingdom, Canada, and the United States offer a lower tax rate of 15%, non-residents had previously opted for taxation under Section 115A of the Act due to its beneficial provisions, including specific exemptions from filing tax returns in India under certain conditions. With the amendment, non-residents are likely to pivot towards claiming benefits under applicable tax treaties, which, while potentially offering lower tax rates, also necessitate additional compliance measures, including tax registrations in India and filing of income tax returns.

    Increased Compliance and Documentation Requirements

    The requirement to file tax returns in India, necessitated by claiming treaty benefits, introduces a new layer of compliance for non-residents. This includes the need for obtaining tax registrations and electronically filing Form 10F, a declaration form used by non-residents to claim treaty benefits. Although there has been a temporary relief allowing manual submission of Form 10F until 30 September 2023, electronic filing will become mandatory thereafter, adding to the compliance burden for non-residents without a tax registration number. Moreover, Indian payers making royalty or FTS payments to non-residents must now ensure that they collect and maintain specific documents from the non-residents to apply the treaty rates of withholding tax. These documents include the Tax Residency Certificate, No Permanent Establishment Declaration, and the electronically filed Form 10F. Failure to comply with these documentation requirements may result in withholding tax being applied at the higher domestic rate, along with potential penalties for the Indian payer.

    Potential Impact on Indian Payers

    The amendment could also have financial implications for Indian payers, especially in cases where royalty or FTS payments are grossed-up to cover the tax liability of the non-resident recipient. The increased tax rate may lead to higher cash outflows for Indian payers, emphasizing the importance of efficient tax planning and compliance.

    India Finance Act 2023 - Conclusion

    The Finance Act 2023's decision to double the tax rate on royalty and FTS for non-residents marks an important change in India's tax regime, aiming to align with global taxation practices. While this may increase the tax burden and compliance requirements for non-residents, leveraging tax treaty benefits could mitigate some of these challenges.

    Final thoughts

    As India continues to refine its tax laws, it is crucial for non-residents and Indian payers alike to stay informed and compliant with the evolving legal landscape. If you have any thoughts on this article then please get in touch.
    BudgetsEconomic eventsInternationalTax treaties

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