How Are Non-Residents Taxed on Royalties and Fees for Technical Services?
Mar. 29 – When a non-resident earns any income in India by way of royalties or fees for technical services, they are liable to pay the relevant taxes. The official definition of royalties and fees, as stipulated by Section 9 of the Income Tax Act 1961, can be found below.
Royalties for technical services
This refers to any monetary considerations (including any lump sum considerations, but excluding any considerations defined as income chargeable as capital gains) for the following:
- The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula, trademark or similar property;
- The imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula, trademark or similar property;
- The use of any patent, invention, model, design, secret formula, trademark or similar property;
- The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
- The use or right to use any industrial, commercial or scientific equipment, but not including the amounts referred to in Section 44BB of Income Tax Act 1961;
- The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work, including films or videotapes for use in connection with television, or tapes for use in connection with radio broadcasting (this does not include considerations for the sale, distribution or exhibition of cinematographic films); or
- The rendering of any services in connection with any of the aforementioned activities.
Fees for technical services
This refers to any considerations (including any lump sum considerations) for the rendering of any managerial, technical or consultancy services (including the provision of services for technical or other personnel). This does not include, however, considerations for construction, assembly, mining or any similar projects undertaken by the recipient or consideration which would be defined as income for the recipient chargeable under “salaries.”
Recovery of taxes
Taxes are recovered from non-residents by way of withholding taxes. The provisions for taxes imposed on royalties or fees for a non-resident’s provision of technical services are contained in Section 115A of Income Tax Act 1961. The actual tax rate depends on the date of the agreement signed between the Indian resident and the non-resident as stipulated in the following chart:
India’s 2013 budget proposes to increase the tax rate for contracts signed on or after June 1, 2005 from 10 percent to 25 percent. This is a steep hike, yet non-residents do not need to worry too much since they are eligible for the benefits of India’s Double Tax Avoidance Agreement (DTAA) with their respective countries of origin. Specifically, the majority of DTAAs entered into by India specify a tax rate of 15 percent on royalties or fees for technical services.
Where a non-resident is liable to pay taxes as provided in Section 115A of Income Tax Act 1961, they will not be allowed to claim any deductions for expenses incurred as a result of earning their income.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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