Foreign Companies May Be Required To File Tax Returns In India

• Law Firm: Nexdigm Private Limited
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Tax Treaties, Income Tax, Transfer Pricing, Withholding Tax
• Author: Nexdigm Private Limited
• Published date: 24 April 2023

Impact of increase in withholding tax on rates for Fees for Technical Services and Royalty

As per Indian Tax laws¹, payments made to Non-Residents/Foreign Companies for Fees for Technical Services (FTS) and Royalties were liable to tax at the effective tax rate of 10.92% (including surcharge and education cess).

Further, Indian Tax Laws² also provide that where India has entered into a Double Tax Avoidance Agreement (DTAA) with other countries, provisions of the DTAA or Act, whichever is beneficial shall apply.

Currently, many Tax Treaties signed by India with major countries like the United States of America, the United Kingdom, etc., prescribe a higher tax rate of 15% for Royalty and FTS. Further, many other Treaties with countries like Germany, Japan, Singapore, France, etc, provide for a tax rate of 10%.

Relaxation from filing of tax return in India

Indian local laws provide for relief from the filing of the tax return in India for foreign companies/non-residents if the following conditions are satisfied:

1. income earned only from dividends, interest, royalties, or fees for technical services, and
2. the tax is deducted as per the local laws of India.

Based on the above, non-residents from countries where the tax rate was 15% were opting to be governed by local Indian laws. Also, for non-residents in the case of countries where the tax rate was 10%, where opting to be governed by Indian local laws as it provided relaxation from filing a tax return in India as the differential cost was only 0.92% (10.92% v 10%).

Recent Amendment under Indian Local Laws

India has recently amended its local laws. One of the critical changes included increase in effective tax rate on Royalty and FTS from 10.92% to 21.84% (including applicable surcharge and cess) with effect from 1 April 2023.

Through this move, the non-residents/foreign companies will be compelled to avail of the tax treaty benefits, as the treaty rates would now be more beneficial in comparison to the earlier scenario.

Typically, to avail of Tax Treaty Benefits, Indian law requires the Non-Resident/Foreign Company to submit a Tax Residency Certificate (TRC) and other declarations. However, where the TRC does not contain all the details as required by Indian Laws, an additional form known as Form 10F is required to be submitted along with the TRC.

It would also be pertinent to note that recently, the Central Board of Direct Taxes (CBDT) in India has mandated electronic filing of Form 10F by non-residents, as...