Budget 2013, Tax For NRIs Receiving Royalties Or Fees From India To Go Up
Budget 2013 saw a steep hike in the tax rate on royalties and fees for technical services that an Indian company pays to a Non Resident Indian or a Foreign Company. The rate went up from 10 per cent to 25 per cent.
This was done in order to correct an anomaly. The rate of tax on royalty in the Income-tax Act was lower than the rates provided in a number of Double Tax Avoidance Agreements.
So who does this impact?
NRIs receiving royalties
Royalty essentially means any payment made where the original property is retained by the owner and only the right to use is licensed out to the user. According to the Income Tax Act, in the context of this clause, "royalty" means consideration for any of the following:
- the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property
- the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property
-the use of any patent, invention, model, design, secret formula or process or trade mark 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
- the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films
-the rendering of any services in connection with the activities referred to above
NRIs receiving fees for technical services
"Fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration that may come under the head "salaries." If you fall under either of the above two definitions, your income tax rate on such receipts will now be 25 per cent instead of 10 per cent.
Relief under the Double Taxation Avoidance Agreement (DTAA)
If you are an NRI residing in a country that India has a DTAA with, then the rate of 25 per cent will not apply to you. In the case of India-US DTAA, the following rates will apply to you.
In case of royalties (Article 12 of India US DTAA), during the first five taxable years for which this Convention has effect,
(A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of India, a political subdivision or a public sector company; and
(B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and
During the subsequent years, 15 per cent of the gross amount of royalties or fees for included services.
In the case of royalties and fees for included services that are ancillary and subsidiary to the enjoyment of the property for which payment is received, 10 per cent of the gross amount of the royalties or fees for included services.
If you are an NRI receiving royalty payments for services provided in India, you will be subject to TDS as per the rates mentioned above. You will however also be taxed in the US but you can claim a credit of the TDS paid in India.
If you are an NRI providing professional services (Article 15) to a company or person in India, the income will be taxed only in the US. Therefore, no tax would be deducted at source on this income.
Claiming the reduced rate
In order to claim the reduced rate of TDS or waiver of TDS under the DTAA, you would need to submit a tax residency certification from the country of your residence. This will certify that you are a tax paying resident in that other country and that tax on that income is being duly paid in that country, ensuring no leakage of tax revenue for either countries. In the US, the tax residency certificate is called Form 6166 and the application needs to be made to theInternal Revenue Service (IRS) in Form 8802.