ITR to be filed by non-residents in case earning royalty/FTS

Impact on ITR has to be filed by non-residents in the case earning royalty/FTS income

key implications of the Section 115A amendment and its impact on ITR filing for non-residents earning royalty/FTS income:

• Amendment in Section 115A (2023): The withholding tax rate for fee for technical services (FTS) increased to 20% + surcharge + cess, making the effective rate 20.8%. This is significantly higher than the rates available under most Double Taxation Avoidance Agreements.
• Double Taxation Avoidance Agreements Benefit & Lower Withholding Tax: Many tax treaties (e.g., with the US, UK, and Canada) provide a 15% tax rate. Other treaties (e.g., Belgium, Netherlands, Singapore) offer a 10% tax rate. And Non-residents prefer the Double Taxation Avoidance Agreements rate since it is lower than 20.8%.
• Sec 90(2) – More Beneficial Treatment: A non-resident taxpayer can choose between the domestic tax law (115A) or Double Taxation Avoidance Agreements, whichever is more beneficial. Since Double Taxation Avoidance Agreements rates are lower, non-residents opt for Double Taxation Avoidance Agreements

Income tax return filing requirement under Sec 115A(5):

• Exemption from income tax return filing applies only if taxes are withheld at the 115A rate (20.8%). If Double Taxation Avoidance Agreement rates (10-15%) are applied, the non-resident must file an Income Tax Return Filling in India to report and validate the correct tax rate.
• Non-residents who claim a lower Double Taxation Avoidance Agreements rate for fees for technical services (FTS) must now file an income tax return in India. This ensures compliance with Indian tax laws and proper tax reporting.

Withholding tax obligations under Indian tax laws for both resident and non-resident entities

Summary of withholding tax (WHT) obligations under Indian tax laws for both resident and non-resident entities. Here are the key points from the information provided:

WHT for Payments to Resident Companies:

1. Purchase of Goods: TDS applies on purchases exceeding INR 5 million at a rate of 0.1%.
2. Specified Type of Interest: No threshold, tax rate 10% (reduced to 5% in some cases).
3. Non-Specified Type of Interest: TDS applies on payments exceeding INR 5,000, taxed at 10%.
4. Professional and Technical Services: Payments above INR 30,000 are subject to 10% (professional) and 2% (technical) withholding tax.
5. Royalty and FTS: TDS of 10% applies for amounts above INR 30,000 (reduced to 2% for certain royalties).
6. Perquisites and Dividends: Tax rate of 10% for perquisites above INR 20,000, dividends above INR 5,000.
7. Payments on Property Transfers & Other Transactions: Various rates, including 1% for property purchases above INR 5 million.

WHT for Payments to Non-Resident Companies:

1. Interest on Foreign Currency Borrowings: TDS at 5%.
2. Royalty and FTS: Tax rate is 20% (with exceptions for certain treaties).
3. Capital Gains: Long-term capital gains taxed at 10% for equity shares on which STT is paid, 20% for others.
4. Other Income: Tax rates range from 30% for gaming winnings to 35% for other income.
5. No Threshold for Non-Residents: Withholding tax is applicable on all payments to non-residents without any minimum threshold.

Special Considerations:

1. Liberalized Remittance Scheme (LRS) & Overseas Tour Packages: TCS on LRS for education/medical reduced from 20% to 5%; 20% TCS applies on overseas tour package purchases beyond INR 700,000.
2. A PAN is required for financial transactions exceeding INR 250,000. If the deductee does not provide PAN, withholding tax is applied at the higher of the relevant tax rate or 20%.

Tax Treaty Rates:

Tax treaties between India and other countries may offer lower WHT rates. For example:

• Australia: Dividend 15%, Interest 15%, Royalty 10%/15%, Technical Services 10%/15%
• Mauritius: Dividend 5%/15%, Interest 7.5%, Royalty 15%, Technical Services 10%