The classification of royalties and fees for technical services as income in India under the Income-tax Act, 1961 is an intriguing subject. Section 9 of the Act defines the categories of income deemed to accrue or arise in India, which includes royalties and fees for technical services (FTS). This article aims to explore the definitions and implications of these categories and shed light on the concept of Tax Deducted at Source (TDS) and its rates for residents and non-residents.
Have you ever wondered how royalties and fees for technical services are classified in terms of income in India?
The Income-tax Act, 1961 (“Act”) holds the key to this intriguing question.
Section 9 of the Act unveils certain categories of income that are deemed to accrue or arise in India, and among them are royalties and fees for technical services, often referred to as FTS.
As per Section 9 of the Act, Royalty and Fees for technical services deemed to accrue or arise in India, if the said income is payable by:
1. the Government; or
2. a person who is a resident, except where payable for the purposes of a business or profession or source of income of the resident outside India; or
3. a person who is a non-resident, for the purposes of a business or profession or source of income of the non- resident in India
But what exactly falls under this classification?
Let’s delve into the captivating definition of “Royalty” and “Fees for Technical Services”
Explanation 2 of Section 9(1)(vi) of Act provides the definition of Royalty. Royalty refers to consideration received for the transfer of rights, imparting information, use of intellectual property, imparting technical or scientific knowledge, use of industrial or scientific equipment (However, amounts referred to in section 44BB of the Act are excluded from the definition of royalty), transfer of copyright, and services in connection with intellectual property.
Explanation 4 of Section 9(1)(vi) clarifies that the transfer of rights in computer software, including granting licenses, is considered royalty regardless of the medium used for such transfers.
Explanation 5 of Section 9(1)(vi) further emphasizes that royalty includes consideration received for any right, property, or information, regardless of possession or control by the payer, direct usage by the payer, or the location of such right, property, or information (whether in India or elsewhere).
But there’s more to it. The definition of fees for technical services adds another layer of intrigue.
Explanation 2 of Section 9(1)(vii) provides the definition of Fees for technical services:
Fees for Technical Services refers to the consideration received for providing managerial, technical, or consultancy services, including expertise and advice. It also includes providing services through technical personnel or skilled individuals. However, fees for technical services do not cover services related to construction, assembly, mining, or similar projects, and they exclude salary income classified under the “Salaries” category.
In summary, fees for technical services involve compensation for specialized services rendered, excluding certain project types and employee salaries.
Concept of TDS for Royalty and Fees for Technical Services
However, the intricacies of taxation don’t end there. Within the provisions of the Act lies the concept of Tax Deducted at Source (TDS), a visionary mechanism ensuring transparency and accountability in financial transactions. TDS is applicable to both residents and non-residents, shaping a harmonious financial ecosystem.
The applicable TDS rate for Royalty and Fees for Technical Services for Residents
Let’s delve into the intriguing topic of TDS deductions on royalty and fees for technical services, specifically for payments made to residents.
Where residents are subject to taxation on their worldwide income, Section 194J of the Act – a crucial provision determines the liability to deduct TDS.
Let’s explore the different categories of services and payments that are covered by Section 194J.
To ensure TDS compliance under section 194J, entities excluding individuals or Hindu Undivided Families (HUFs) are required to deduct TDS when procuring services or making payments for:
1. Professional fees: Fees for the services availing for legal, medical, engineering, accountancy, etc.
2. Fees for Technical Services: Fees for managerial services.
3. Payments of Director’s remuneration/fees/commission (excluding salary)
4. Royalty
5. Payment for Non-compete fees or fees paid not to share technical know-how.
Note: There are exceptional cases where even individuals and HUF are drawn into the realm of TDS deductions under Section 194J.
Although individuals and HUFs are typically exempted from the obligation of deducting TDS under section 194J, there are certain exceptional circumstances where they are liable to do so: –
1. In case of Individual or HUF is carrying on business and his turnover exceeds INR 1 Crore during the previous financial year.
2. In case of Individual or HUF is carrying on profession and his turnover exceeds INR 50 Lakh during the previous financial year.
Some Important Points for consideration:
- TDS should be deducted under section 194J when the fees amount or the cumulative amount of fees, credited or paid, or expected to be credited or paid in a financial year, surpasses INR 30,000 for each specific service category.
- Nevertheless, in the case of remuneration/fees/commission paid to directors, TDS must be deducted regardless of whether it exceeds INR 30,000 or not
- It’s important to note that TDS is not applicable if the professional or technical services are availed for non-business purposes.
The specified limit under section 194J
The TDS rate applicable under section 194J is 10% for Professional fees, Royalty, Director’s remuneration, and non-compete fees, while it is 2% for Fees for technical services. If the PAN (Permanent Account Number) is not provided by the payee, the TDS rate increases to 20%
The applicable TDS rate for Royalty and Fees for Technical Services for Non-Residents
Now, let’s delve into the realm of tax choices available to nonresidents.
Nonresident individuals are liable for taxation exclusively on income derived from India, specifically encompassing income that accrues, arises, or is deemed to accrue or arise within the country. Consequently, income generated from royalties and technical services is considered to accrue or arise in India, as previously expounded, rendering it subject to taxation for nonresidents.
Optimizing Taxation: Choosing Between ITA and DTA Agreements
According to Section 195 of the Act, individuals in this category have the power to elect to be taxed either under the Income Tax Act (ITA) or under the provisions of an applicable Double Taxation Avoidance (DTA) agreement. The golden rule here is to opt for the option that brings you the most significant benefits.
Revamped Tax Deduction Rates:
In the latest governmental amendment, the provisions of the Act have remained unaltered. Nonetheless, an intriguing development arises in the form of a revised tax deduction rate applicable to payments related to royalties and fees for technical services disbursed by the Government or an Indian concern. Previously established at 10%, this rate has now been elevated to a compelling 20%. This adjustment brings forth an enticing opportunity for consideration, prompting individuals to evaluate its potential impact on their financial affairs and make informed decisions accordingly.
A new requirement has been introduced for nonresidents who want to take advantage of the benefits provided by a Double Taxation Avoidance (DTA) agreement under Section 90(4) of the Act. To qualify for these benefits, nonresidents need to provide a valid Tax Residency Certificate (TRC) issued by their country of residence. Additionally, if the TRC is missing important details, they must also submit Form 10F. It’s important to fulfill these documentation requirements to comply with the regulations and make the most of the advantages offered by the DTA agreement.
Now, here’s where it gets even more interesting.
These crucial documents must be filed through the Indian tax portal, which necessitates Indian tax registration in the form of a Permanent Account Number (PAN). However, it’s worth noting that not all nonresidents possess a PAN at the moment. But fear not, as there’s a temporary relaxation of the PAN requirement in effect until September 30, 2023.Additionally, an Indian tax return must be filed if DTA benefits are claimed.
Impact of the amendment on the Non-Residents:
1.Non-Resident hailing from the land where the DTA Agreement has been woven in harmony with India:
Nonresident individuals originating from countries that have a beneficial Double Taxation Avoidance (DTA) rate of 15% (such as Australia, Belarus, Mauritius, Oman, UK, and the U.S.) may now face a pivotal decision in their tax planning. Previously, they had the option to pay taxes at the domestic rate in India, which stood at 10.92%. However, circumstances have changed with the implementation of a higher domestic rate of 21.84%. This update necessitates a careful evaluation of their tax strategy to ensure optimal compliance with the new regulations.
- In order to enhance their tax position, these discerning individuals may now consider reassessing their decision and gravitating towards the attractive rate of 15% offered by the Double Taxation Avoidance (DTA) agreement. However, embarking on this path of tax optimization entails assuming a series of additional responsibilities as previously expounded, fulfilling specific compliance obligations, including the provision of a Tax Residency Certificate (TRC) and Form 10F, an Indian tax registration in the form of a Permanent Account Number (PAN) and fulfill the requirement of filing a tax return in India. These measures ensure adherence to the prescribed guidelines and facilitate a seamless integration into the revised tax framework.
2. Non-Resident hailing from the land where the DTA Agreement has not been woven in harmony with India:
- Nonresident individuals who were previously obligated to pay taxes at a rate of 10.92% will now be subject to a higher tax rate of 21.84% as per domestic legislation. The compliance requirements, however, remain unchanged.
Unleashing Tax Revolution: A New Chapter Begins
Prepare for a new chapter in the tax realm, as the altered withholding tax rate casts its shadow upon the concerned nonresident taxpayers. As this rate change took effect on 1st April 2023, many individuals might find themselves unexpectedly facing additional compliance responsibilities.
Together, we shall navigate the complexities of tax obligations, paving the way for a seamless transition and unlocking the promising benefits that await us.
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