Foreign investors will now have to choose between paying additional taxes and not face any harassment from the income tax department or pay lower taxes and continue with scrutiny from the tax officials.
FM Nirmala Sitharaman has recently, in the Union Budget 2020, announced that the foreign investors could opt-out of filing income tax returns in India if they do not avail the tax treaty benefits.
To explain, Budget 2020 proposed that a non-resident individual or a foreign company will not be required to file income tax returns in India if:
- His or its total income consists of dividend income or interest income, or
- His or its total income consists of royalty or fee for technical services (FTS) received from the government or any Indian entity under a contract made after the 31st of March 1976, and
- Tax on such income has been deducted at the rates which exceed the prescribed tax rates mentioned under Section 115A
As per a majority of tax treaties, the withholding tax rate on royalties and technical fees paid to the investors outside India is 10% which is less than the rate prescribed in the income tax act and does not include surcharge and cess. After the proposal to amend the section 115A, the foreign companies with lower taxable income from India might ask their clients to deduct tax at source at a higher rate and not the tax treaty rate to escape the compliance burden of filing income tax returns in India.
To summarise, according to the recent changes made to the finance bill, any foreign investors including FPIs, MNCs will have two choices either avail the benefit of the tax-treaties and pay 10% tax and file income tax returns or not file tax returns and pay taxes more than the tax-treaties.
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