Increased Tax Rate for India’s Outbound Remittances from July 2023

Taxes are levied in India in accordance with the residence rule, i.e., taxes levied on an individual or company shall depend on their residential status as per the Income Tax Act, 1961 and other relevant provisions and guidelines available to determine an individual or entity’s residential status.

When it comes to non-residents, tax is only levied for the income earned in India. Income from sources such as royalties and fees for technical services that non-residents earn in India is considered taxable under the Indian taxation system. However, non-residents do have the choice of being taxed either as per the provisions provided in the Income Tax Act, 1961, or any applicable double taxation avoidance agreement (DTAA). Non-residents may choose to go with whichever of the two is more beneficial for them.

What has been Amended?

Section 115A of the Income Tax Act, 1961 provides guidelines in relation to the tax applicable to non-residents in India. It basically defines the various tax rates for income from different sources like royalties, fees for technical services, etc., earned by non-residents in the territory of India. Considering its role in defining taxation for non-residents in India, Section 115A can arguably be considered one of the most crucial provisions under the Income Tax Act, 1961.

To position the tax rate applicable on royalties and fees for technical services provided by non-residents in India with the international standards, the Government of India amended Section 115A of the Income Tax Act, 1961 in March 2023. This shall, further, improve domestic investments and innovation in the country as well.

The withholding tax rate has been doubled by the Finance Act, 2023 on royalties and fees for technical services accrued by non-residents in India. The previous rate of 10% now stands at 20% (21.84% to be exact, which includes 5% surcharge and 4% education cess). While the Finance Bill, 2023 had been primarily introduced in the Parliament when the budget for the financial year 2023-24 was announced in February 2023, over 60 modifications were made to it by the Parliament. However, it must be noted that the withholding tax rate amendments were not part of the original bill presented to the Parliament.

Following are the amendments made to Section 115A:

• While non-residents have been paying 20% tax on dividend income received in an International Financial Services Center (IFSC), the amendment proposed a 10% concessional tax on dividend income received in an IFSC.
• An increase in the tax rate on income through royalties and fees for technical services earned by non-residents or foreign companies was also introduced under the amendment. The recommendation was to increase the tax rate from 10% to 20% (surcharge and cess not included).

Foreign Outbound Remittance	Amendment to the Tax Rate
Dividends from income from IFSC Units	Reduced to 10%
Income from Royalties and Fees for Technical Services	Increased to 20%

Note: From April 2023, it is mandatory for non-residents to file their income tax returns (ITR) in India if they want to claim any tax treaty benefits.

Position Prior to the Amendment

S. No.	Tax Treaty Rate	Domestic Rate	Beneficial	TRC & Form 10F	PAN	Annual Filing
1	10%	10.92%	Tax Treaty	Required	Required	Required
2	15%	10.92%	Domestic	Not Required	Not Required	Not Required
3	20%	10.92%	Domestic	Not Required	Not Required	Not Required
4	No Tax Treaty	10.92%	N.A.	Not Required	Not Required	Not Required

Position Post Amendment

S. No.	Tax Treaty Rate	Domestic Rate	Beneficial	TRC & Form 10F	PAN	Annual Filing
1	10%	21.84%	Tax Treaty	Required	Required	Required
2	15%	21.84%	Tax Treaty	Required	Required	Required
3	20%	21.84%	Tax Treaty	Required	Required	Required
4	No Tax Treaty	21.84%	N.A.	Not Required	Not Required	Not Required

Double Taxation Avoidance Agreement/Tax Treaties

Double Taxation Avoidance Agreements, commonly referred to as ‘DTAA,’ are agreements between two countries that aim to safeguard residents of both countries who earn an income from the other country from being taxed twice for the same transactions. As such, any tax paid by non-residents or foreign companies in India can be used to claim tax relief in their own country. In addition, this also means that non-residents and companies from a country that has a DTAA with India can choose to avail of lower tax rates.

The double tax relief is offered in relation to income, for which the income tax has been paid either in India or the individual or company’s home country.

• As of now, India has signed such agreements with 130 countries, such as Australia, Japan, US, UK, France, Italy, Spain, China, Canada, etc. In addition, India also has limited agreements with respect to the income of airline/merchant shipping with over 15 countries.

• Most Favored Nation (MFN) Clause

There is an MFN clause in the DTAAs that India has signed with some countries. This basically means that individuals or companies from such countries who are earning an income or conducting business in India shall automatically be charged with a lower tax rate on royalties and fees for technical services.

• Benefits for Non-Residents

A combination of DTAA and the MFN clause means that an individual from a country that has an MFN clause with India may enjoy the benefits of a lower tax rate even if their country no longer has a DTAA with India. This also acts as an incentive for countries when negotiating beneficial tax rates for the residents of their country with India.

Effect on Indian Companies

• Payments made by Indian companies to non-residents shall be significantly affected owing to the increased tax rate on royalties and fees for technical services.
• This increase in the tax rate basically means that Indian companies shall be expected to pay more taxes on the payments they make to non-residents, which is bound to significantly increase their business expenses.
• Indian companies may adhere to the Income Tax Act and the DTAAs that India has with other countries to manage the impact of this amendment.
• Indian companies can also discuss with the non-residents to share the increased tax burden or renegotiate the terms of the agreement to adjust the increased tax rates in their payment structure.
• These changes may potentially reduce the interests of non-residents in relation to their choice to reside in India, and lead to them refraining from choosing the country for investments or offering any technical services.
• Role of ITR post Increase in Tax Rate
• Post amendment, it has been deemed necessary for non-residents earning an income or receiving fees for technical services to file ITR in India from April 2023.
• Non-residents must adhere to the provisions of the Income Tax Act, 1961 to avoid any fines or legal repercussions.
• Indian companies that make any payments to non-residents (for technical services or royalties) must ensure to deduct the required tax amount (as per the increased tax rate) when making and deposit the same timely as well.
• Both non-residents and companies must adhere to the rules and regulations and timely file their ITR of the Income Tax Act, 1961 to avoid any issues in the future.
• There may be some increase in the administrative workload of non-residents and Indian companies due to the increased tax rate and compliance necessities.

Conclusion

Although there are a number of ways that the Government of India provides you to reduce your tax burden, be it through DTAAs or MFN clauses, it is inarguably crucial for both non-residents and Indian companies to ensure compliance with the rules and regulations related to taxation in India.


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