Finance Bill: Withholding tax on royalty and technical fee doubled to 20%

The Centre has decided to double the withholding tax on royalties and fees paid for technical services provided by non-resident firms. The withholding tax has been increased from 10 per cent to 20 per cent.

The decision is part of the 64 amendments introduced through the Finance Bill 2023. Finance Minister Nirmala Sitharaman presented the bill in the lower house on March 24. It will now be tabled in the Rajya Sabha for its approval.

What is withholding tax?

Indian subsidiaries of multinational companies (MNCs) remit substantial amounts of money in the form of royalties or fees for technical services to their non-resident parent entities for using the global brand. Even Indian companies make such payments to non-affiliated parties when they procure technical know-how or licensing rights from foreign companies.

When payments are made for such services, Indian law requires that tax on such payments be withheld, which has now been increased to 20 per cent according to the latest legislation.

The alternatives 

Foreign entities receiving the royalty or fee for technical services have the facility to opt for the lower rate prescribed in the tax treaties applicable to various countries. A lower rate will result in greater compliance obligations for Indian payers as well as foreign recipients.

For example, India and Singapore have a tax treaty on royalties and fees for technical services, setting the rate at 10 per cent. Under the India-US tax treaty, the rate is typically 15 per cent.

Notably, most tax treaties with India, including those with Singapore, France, Germany, Japan, Malaysia, Luxembourg, and the UAE, set royalties and fees on technical services at 10 per cent. 

A report in The Times of India quoted an expert as saying that the change in rates will result in increased compliance as companies wanting to avail of the benefits under tax treaties will need to obtain PAN, file tax returns in India, and obtain tax residency certificates.