Withholding tax on royalty fees doubles to 20%

Fed delivers small rate hike

MUMBAI: The Lok Sabha cleared the Budget Bill on Friday, raising the withholding tax rate under the Income Tax (I-T) Act from 10% to 20% for royalties and fees for technical services (FTS) given to non-resident corporations.
For the use of the global brand or under licence agreements for technological know-how, Indian subsidiaries send sizeable sums as royalties or FTS to its overseas parent or affiliate business. Even Indian businesses pay non-affiliated parties in this way when they acquire, example, licencing rights.
Tax, which is currently withheld at 20% per Indian tax legislation, must be deducted from such payments. If the Indian party is grossing up the withholding taxes, the costs could increase (in other words, they are bearing the tax cost).
There will be more compliance requirements for both the Indian payer and the foreign recipient if the foreign firm receiving the royalties or FTS income chooses the lower rate specified in the tax treaty. For instance, the tax treaty on royalties and FTS under the tax treaty between India and Singapore is 10%, while the tax treaty between India and the US is normally 15%.

“International corporations generating royalties or FTS were not obliged to file tax returns in India if the income was liable to tax at a rate not lower than that provided in section 115A,” said Sheetal Shah, an associate partner with EY-India. Foreign entities are likely to revert to the lower rates outlined in the relevant tax treaties if the domestic tax rate is raised to 20%. Due to this, they will be more compliant in getting PANs, filing tax reports in India, getting tax residence certificates to claim tax treaty benefits, etc.

While treaty provisions can be used to lessen the tax burden, KPMG India partner and national head (BFSI – tax) Sunil Badala concurred that doing so would typically make a relatively simple compliance provision more complicated because additional checks for treaty entitlement would need to be looked at.

Shah emphasised that, from a risk-mitigation standpoint, it is likely that the Indian payer will also want to contact tax authorities in order to request a reduced withholding tax order.