Budget Tangles Royalty Taxation

Royalties and fees for technical services are taxed at the rate of 20 per cent of the gross amount. However, this is subject to two exceptions.

Where the royalty or fees for technical services is earned by a foreign concern, which belongs to a country with which India has a tax treaty, the rate of tax is determined according to the treaty.

If the rate of tax is lower than 20 per cent in the treaty, then such a tax is applied on the gross amount of the income.

Where the recipient of income does business in India through a permanent establishment or a base in India, and the royalty or fees for technical services is effectively connected with such a permanent establishment or fixed base, then the said income instead of being taxed at a fixed percentage of the gross amount is taxed as business profits at the normal rate of tax as is applicable to the non-resident recipient of income.

 

Section 90(2) of the Income Tax act specifically provides that where the government has signed a tax treaty with any country, the provisions of the income tax shall apply to the extent that they are more beneficial to that assessee.

Where there is a conflict between the tax treaty and the Income Tax Act, a taxpayer can take advantage of the provision which is more beneficial to him.

In contrast to this, where the recipient of royalty does not belong to a country with which a tax treaty exists, the royalty or fees for technical services will be taxed at 20 per cent of the gross amount.

In such a situation, the rate of tax remains 20 per cent. Thus, there could be a substantial difference in the rate of tax depending upon the country to which the recipient of income belongs.

To harmonise the provisions relating to income by way of royalty or fees for technical services, the Finance Bill, 2003, proposes to insert a Section 44DA, which provides that in cases where the royalty or fees for tehncial services is effectively connected with a permanent establishment or a fixed place of profession, then the said income will be computed under the head