Income tax determination on royalty and fees for technical services

Section 115A of the Income-tax Act provides for determination of tax in case of a non-resident taxpayer where the total income includes any income by way of Royalty and Fees for technical services (FTS) received under an agreement entered after 31.03.1976 and which are not effectively connected with permanent establishment, if any, of the non-resident in India. Prior to amendment of section 115A by the Act, the tax was payable on the gross amount of income at the rate of 

(i) 30% if income by way of royalty or FTS is received in pursuance of an agreement entered on or before 31.05.1997; 

(ii) 20% if income by way of royalty or FTS is received in pursuance of an agreement entered after 31.05.1997 but before 01.06.2005; and 

(iii) 10% if income by way of royalty or FTS is received in pursuance of an agreement entered on or after 01.06.2005. 

India has tax treaties with 87 countries, majority of tax treaties allow India to levy tax on gross amount of royalty at rates ranging from 10 per cent to 25 per cent, whereas the tax rate as per section 115A is 10 per cent. In some cases, this has resulted in taxation at a lower rate of 10 per cent even if the treaty allows the income to be taxed at a higher rate. 

In order to correct this anomaly, the tax rate in case of non-resident taxpayer, in respect of income by way of royalty and fees for technical services as provided under section 115A, has been increased from 10 per cent to 25 per cent. This rate of 25 per cent shall be applicable to any income by way of royalty and FTS received by a non-resident, under an agreement entered after 31.03.1976, which is taxable under section 115A. 

Applicability: - This amendment takes effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.

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