The Finance Bill, 2013 proposes to increase the tax rates on Royalty and Fees for Technical Services (FTS) for non-residents/foreign companies to 25 per cent (27 per cent+ incl. Surcharge and cess). The current rate is 10.506 per cent (for agreements before June, 1 2005 – 21.012 per cent).
Indian businesses make various payments considered as royalty under the tax laws, e.g., user charges for IP, brands, equipment. Additionally, there is a sizeable payment for software import which the Indian tax authorities also consider as royalty. FTS is payment for services of consultancy, managerial or technical nature which also is subject to tax rate like royalty.
The increase in the rates is likely to have a significant impact on the cost of these imports. In case of non treaty countries, the tax rates would go up by about 15-16 per cent. The increased tax cost is likely to be pushed down by the foreign recipient of the royalty to the payer in India.
That would require a grossing up of the tax which would end up in the tax rate rising to 35-37 per cent — a jump of over 23 per cent.
The beneficial rate under the tax treaties could no doubt provide some respite. In most treaties (Germany, Switzerland, Singapore) the tax rate on royalty/FTS is 10 per cent. However, the tax rate under the treaties with the US and the UK is 15 per cent which would see a minimum increase of 4-6 per cent even after applying the treaty tax rate. Additionally, for availing the treaty benefit, the non resident has to produce tax residency certificate from the Revenue Authorities of its home country with particulars prescribed by the Indian Revenue. This may pose a practical difficulty.
The proposal may augment revenue collection for the Government, but may not be appropriate for businesses to have an additional cost burden in the current economic scenario.
(The author is Executive Director - Tax and Regulatory Services, PwC India.)