Recently Indian government amended local tax laws in the finance bill. Among many amendments, some notable ones are raising the withholding tax rate on royalties and FTS gained by non-residents and foreign corporations. Because of these amendments, Starting on April 1, 2023, the tax rate on royalties and FTS increased from 10.92% to 21.84% and that also includes surcharge and cess. Given that the treaty rates have progressively become more favourable to people who are not residents and foreign business entities, it’s more likely that they are going to take full advantage of tax treaty perks.
Conditions Before the Changes
Before considering the previous scenario it’s also necessary to take into account that India has agreed to enter into a double tax avoidance agreement (DTAA) with other countries. According to Indian Tax Laws, the provisions of the Act are only applicable when they happen to be more beneficial for non-residents and foreign companies. Therefore if the DTAA’s provisions are more beneficial, they shall take priority over those contained in the Act. India has entered into serval DTAA treaties with countries like the US and the United Kingdom. Where at present tax rates are as higher as 15%. In addition, several additional Treaties with different countries like Singapore, Germany, and France stipulate a tax that is equal to 10%.
Now if we talk about the previous scenario if you are a non-resident and don’t want to file your taxes in India. Indian local laws provide relief from filing tax returns in India if the following conditions are satisfied.
- First of all, the Foreign Company/Non-Resident’s sole streams of revenue are from dividends, interest, royalties, or payments for technical services.
- Secondly, the tax is withheld in accordance with Indian local laws without seeking tax treaty benefits.
As a consequence, non-residents who were from nations with a tax rate of fifteen per cent chose to have their taxes regulated by Indian law. Additionally, in cases in which the tax rate was 10%, non-residents could choose to be governed by Indian local laws, which relieved them of the burden of filing a tax return in India because the price difference was only 0.92%. Due to the fact that the treaty rates are now more advantageous than they were previously, the new amendments will now force non-residents and foreign corporations to make use of the tax treaty benefits.
Requirements for Getting Tax Treaty Benefits
According to Indian law, non-resident/foreign companies are required to submit a Tax Residency Certificate (TRC) along with additional declarations in order to take advantage of tax treaty benefits. Applicants must submit Form 10F when the TRC does not include all the information necessary under Indian law.
Also, the Central Board of Direct Taxes recently announced that a non-resident now only file form 10F electronically. Additionally, until the end of March 2023, the Central Board of Taxes ( CBDT ) offered short-term relief for non-residents who were lacking an Indian Permanent Account Number (‘PAN’), more commonly referred to as an Indian Tax Registration Number, to fill out Form 10F manually. Later this limit was exceeded till September 2023. Because of this, it is essential for Non-Residents/Foreign Companies to electronically upload the required documentation, including Form 10F if they wish to take advantage of the Tax Treaty’s reduced tax rates.
These changes now make it necessary for non-residents and foreign-owned businesses to register PANs in India and file the necessary paperwork in order to take advantage of tax treaty perks. The aforementioned companies are required to set up an online account on the nation’s government portal, in order to file Form 10F electronically. All non-residents wishing to take advantage of tax benefits provided by treaties are indirectly required to obtain a PAN.
Companies have to pay taxes in India whether they are an Indian company or a foreign company. But the foreign company that has a pan number, do their business operations and make profits from India are required to report their taxes. Even though they have previously paid some taxes in accordance with the tax agreements, they cannot avoid filing their taxes. When they conduct business with their affiliated companies in India, they must also abide by certain rules.
Foreign Companies are Required to Investigate Benefits
Foreign-based companies and those who are not residents who get income from India must assess how the changes might impact the taxes they pay. Lastly, companies will have to assess their eligibility for Tax Treaty benefits, Once their eligibility is established, they have to acquire the proper registration in India and fulfil every compliance requirement as well.