Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: articles on VAT and GST in India :: TAX RATES - GOODS TAXABLE @ 4% :: ACCOUNTING STANDARDS :: list of goods taxed at 4% :: cpt :: due date for vat payment :: TDS :: ACCOUNTING STANDARD :: Central Excise rule to resale the machines to a new company :: VAT Audit :: ARTICLES ON INPUT TAX CREDIT IN VAT :: empanelment :: VAT RATES :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: form 3cd
« General »
 Simplified one page Income Tax Return Form: Changes to keep in mind before filing tax return for AY2017-18
  No proposal to replace Income Tax with Banking Cash Transaction Tax
 GST coming July 1 despite calls for delay: Revenue Secretary Hasmukh Adhia
 Centre introduces provision of taxation on NPS in Income Tax Act
 Income Tax Department Clarifies On Cash Withdrawal From Banks, Post Offices
 The Goods And Services Tax (Compensation To States) Bill, 2017
  Goods and Service Tax (GST) and Real Estate Sector
 New Income Tax Rules On Home Loan Come Into Effect
 Here's how late filers can save on stress and taxes
 Clarifications on the Taxation and Investment Regime for Pradhan Mantri Garib ?Kalyan Yojana, 2016
 Companies should invest in upgradation of tax technology

Tax on royalty, technical services need scaling down
February, 08th 2010

Existing Income-tax Act provides that income earned by a non resident by way of Royalty or Fees for Technical Services (FTS) shall be charged to income tax at 10 per cent. The rates of tax in most of the Tax Treaties are also 10 per cent in respect of income from Royalty or FTS.

Recently, India has signed tax treaties with several countries, eg: Botswana, Iceland, Myanmar etc., Tax rate in these treaties as also in some other treaties like France, Germany, Ireland, Israel, Malaysia etc. is only 10 per cent.

It appears that income from royalty / FTS is charged to tax at 10 per cent in most of the countries. Even in cases where the domestic tax rates are higher, the tax treaties normally provide a lower rate. In such a situation the rates prescribed in the tax treaty will prevail. (See Azadi Bachao Andolan 263 ITR 706).

Existing Income-tax Act is proposed to be substituted by new Direct Taxes Code. Rates for Royalty or FTS have been prescribed at 20 per cent. Thus, the rates proposed in the Code are two times of the existing rates.

The overall tax rate in the case of foreign company under the existing act is 40 per cent, whereas in new Code it is 25 per cent. However, for TDS, the rate prescribed is 35 per cent. The royalty / FTS is taxable at 20 per cent.

Since the tax at 20 per cent is applicable on the gross amount of royalty / FTS, the net profit margin which the new Code deems on royalty / FTS is very high compared to the margin deemed under the existing Act. To take an example: suppose a foreign company receives Rs 100 as royalty. Under the existing law it shall pay Rs 10 as income tax.

It impliedly means that the profit which is expected out of Rs 100 is estimated at Rs 25, 40 per cent of which is 10. But, under the new Code, foreign company shall be required to pay Rs 20 as income tax. It implies that the profit which is estimated out of Rs 100 will be Rs 80, 25 per cent of which is Rs 20.

Therefore, the net profit margin which the new Code expects from royalty / FTS receipt is 80 per cent as compared to 25 per cent expected earlier.

Further, to implement the high rate of tax, Section 258(6) of the new Code provides that The provisions of this Code shall not be regarded as discriminatory against the foreign company merely on the consideration that the liability of the foreign company to pay tax is calculated at a rate higher than the rate at which the liability of domestic company is calculated.

Further, sub-section (8) of section 258 provides that neither the treaty nor the Code shall have a preferential status by reason of its being a treaty or law, and the provision which is later in time shall prevail. The effect of the new Code is that Indias domestic laws will effectively override the tax treaty.

This will be against the principles adopted in international practice. Recently, the Supreme Court has affirmed the internationally accepted view. The Apex Court rejected the SLP filed by the department against the order of the Honble Bombay High Court in the case of CIT v Siemens Aktiongesellschaft, [310 ITR 320].

In the said case, the Honble High Court held that by an unilateral amendment in the domestic law it is not possible for one nation which is a party to the tax treaty to tax income which otherwise was not subject to tax under the tax treaty.

It is therefore, recommended that while some provisions of Direct Taxes Code are being reportedly redrafted, the government should re-consider the provisions in respect of non residents. As discussed earlier, the tax rates on royalty and fees for technical services are not only excessively high but that they are highly discriminatory to foreign enterprises.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Multi-level Marketing MLM India Affiliate Marketing Affiliate Marketing Software MLM Software MLM Solutions Multi level marketing solutions MLM Servi

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions