Finance Act 2023 | Increase in Rate of Royalty and Fees for Technical Services

Table of Contents

1. Amendment
2. Tax treaties
3. Implications

1. Amendment

1.1 Law till 31 March 2023

Tax rate for royalty or FTS as per domestic tax law was 10% (plus applicable surcharge and cess) for cases for non- residents not having a PE in India
[effective tax rate of 10.92%*]

1.2 Finance Act, 2023 – Amendment w.e.f 1 April 2023

Tax rate on royalty and fees for technical services income for non-resident taxpayers (not having PE in India) has been increased from 10% to 20% (plus applicable surcharge and cess)
[effective tax rate of 21.84%*]

• A non-resident has an option to opt for tax rates under the domestic law, or treaty, whichever is more beneficial
• However, exemption from filing tax return for non-resident is available for specific income if tax is withheld as per rates under the domestic act

2. Tax treaties

Tax rates on royalty / FTS under tax treaty

3. Implications

Obtaining tax rate for royalty and FTS under tax treaties

1. Documentation requirement:
   • Tax residency certificate
   • Electronic Form 10F
   • No PE declaration
2. Tax registrations:
   • Obtaining Permanent Account Number (PAN)
   • Registration on the online portal
   • Digital Signature certificate
3. Compliance requirement:
   • Furnishing return of income
   • Transfer Pricing compliance – TP report/documentation
4. Treaty eligibility:
   • Evaluate eligibility such as beneficial ownership, substance requirement
5. Tax certainty:
   • Whether advisable to apply for an advance ruling before entering into such a
     transaction, especially for treaties with MFN clause?
6. Tax credit in home country:
   • If voluntary payment of tax is done at 21.84% – evaluating whether tax credit will be available in home/resident country
7. Tax cost through grossing up:
   • Higher tax cost if the tax cost is to be borne by Indian Companies through gross up arrangements

* Assuming highest rate of surcharge