The Finance Act, 2023, introduced a significant amendment to Section 115A of the Income Tax Act, impacting non-residents earning royalties and fees for technical services (FTS) in India.

Key Changes:

• Increased Tax Rate: The withholding tax rate on royalties and FTS for non-residents has been raised from 10% to 20%, effective April 1, 2023. This means payments made to non-residents for these services will now attract a higher tax burden, along with applicable cess and surcharge.
• Impact on Non-Resident Taxpayers: Earlier, non-residents were not required to file tax returns in India if their income consisted only of dividends, royalties, FTS, or interest and if tax was withheld at the prescribed rate. However, due to the increased tax rate, many non-residents may now prefer to claim benefits under the Double Taxation Avoidance Agreement (DTAA) to reduce their tax liability.
• Additional Compliance for DTAA Benefits: Non-residents seeking DTAA benefits must comply with additional tax filing requirements in India, including:
  • Obtaining a Permanent Account Number (PAN)
  • Furnishing a Tax Residency Certificate (TRC)
  • Submitting a No Permanent Establishment Declaration
  • Electronically filing Form 10F
  • Mandatory Tax Return Filing: Non-residents availing DTAA benefits are now required to file income tax returns in India.