India

Increased withholding tax rate (WHT) for royalty and fee for technical service (FTS) payments made to non-residents

The 10% special tax rate, as provided under the domestic tax laws, on royalty and FTS income earned by a non-resident or a foreign company that does not have permanent establishment (PE) in India has been increased to 20%. Accordingly, royalty/FTS incomes that are chargeable to tax for a non-resident on or after 1 April 2023 will require withholding of taxes at the rate of 20% plus applicable surcharge and cess under the domestic tax laws.

However, non-residents or foreign companies can still avail the benefit of a lower tax rate provided in the tax treaties, subject to compliance with the treaty eligibility conditions.

Share issue consideration received by Indian entity from non-residents taxable to the extent it exceeds fair market value (FMV) of shares

The domestic tax law hitherto provided that if a closely held Indian entity receives any consideration from a resident person for issue of its shares and such consideration exceeds the face value of such shares, then so much of the consideration that exceeds the FMV of the shares shall be taxable in the hands of such Indian company.

An amendment has been brought in to include the consideration received for issuance of shares to non-residents. Therefore, starting 1 April 2023, if a non-resident subscribes to share capital of a closely held Indian entity that exceeds the face value of shares, then so much of the consideration that exceeds the FMV of the shares shall be taxable in India in the hands of such Indian entity.

Filing Form 10F manually: Time limit extended till 30 September 2023 for certain non-residents 

In order to be eligible to claim the tax treaty benefits, a non-resident is, inter alia, required to furnish certain details in Form 10F. The said form is required to be filed electronically on the income tax portal. Issues were being faced by non-residents in furnishing such form online in the absence of a Permanent Account Number (i.e. tax identification number); consequently, a temporary relief has been provided to allow non-resident taxpayers to continue to file Form 10F offline till 30 September 2023.

Relief to eligible start-ups

The domestic tax laws provide certain tax deductions to eligible start-ups, provided such eligible start-up is incorporated on or before 31 March 2023. The sunset clause of 31 March 2023 has now been extended to 31 March 2024.

Further, eligible start-up can now carry forward and set off the losses for a period of ten years as compared to the earlier limit of seven years.

Income by way of interest from Indian company: Beneficial WHT rate of 5% shall not be available on loan agreements entered into after 30 June 2023

The domestic tax law provides a beneficial WHT rate of 5% on interest income earned by any non-resident, subject to satisfaction of certain conditions. This beneficial rate was applicable for money borrowed by an Indian entity, by way of entering into a loan agreement or issuing bonds, before 1 July 2023. The aforesaid date has not been extended, hence interest income from an Indian company earned consequent to a loan agreement entered into or bond issued on or after 1 July 2023 shall be subject to withholding at the rate of 20% where the money is borrowed in foreign currency.

Other developments

Withholding on winning from online gaming

New tax provisions have been introduced under the domestic tax law to provide for taxation and withholding on winnings from online gaming. The net winning from online games are to be taxed at the rate of 30% (plus surcharge and cess). Further, taxes are required to be withheld at the end of the financial year (FY) or at the time of withdrawal from the user account, whichever is earlier.

Speedy disposal of appeals

To enable the speedy disposal of appeals pending at the first appellate authority, a new appellate authority at the Joint Commissioner/Additional Commissioner level has been created to handle a certain class of cases involving low-value disputed tax demands.