Home » Tax Buzz » Exemption for non-residents from filing income tax return in India

Introduction
The Government of India in the recent budget, i.e. Finance Bill 2020 extended relief from filing income tax return to non-residents, whose total income consists income by way of royalty and/or fees for technical services [“FTS”] provided that such non-resident is not liable to pay tax other than the tax which has already been withheld at source on such income. This benefit was earlier available to non-residents deriving income by way of interest and/ or dividend.

From reading of the fine print of the amendment proposed in Clause 47 of the Finance Bill 2020, however, it emerges that the aforesaid option to not file tax return in India, would be available to non-residents only if they were to let go the benefit of nil or lower rate of taxation of such incomes as per the Double Taxation Avoidance Treaty (“the Treaty”) which India has entered into with their country of residence.

Existing regime
The requirement to file tax return in India is provided under section 139(1) of the Income-tax Act, 1961 (“the Act”) read with provisos thereto, whereby all companies are required to furnish income tax return irrespective whether the income earned by them (which has territorial nexus with India) is chargeable to tax in India or not. [ref. Castleton Investment Ltd: 348 ITR 537 (AAR); XYZ / ABC Equity Fund: 250 ITR 194 (AAR) for such obligation being cast on foreign companies].

Sub-section (5) of section 115A of the Act, provided relief to the non-resident taxpayers who derive dividend and/or interest income from the requirement to furnish tax return in India, subject to the condition that the tax thereon has actually been withheld by the payer in terms of the provisions of the Act.

At present, no such exemption is available to non-residents deriving income by way of ‘royalty’ or ‘FTS’, which are subjected to tax in India under clause (b) of sub-section (1) of section 115A of the Act.

Proposed amendment
In the Finance Bill, 2020, the provisions of section 115A of the Act are proposed to be amended to extend the exemption of the requirement to furnish tax return in India to non-residents deriving income by way of royalty or FTS, wherefrom tax has been withheld at source. The amended provisions, however, require that the aforesaid exemption of not filing the return of income would apply only in a case where the rate at which tax is withheld by the Indian payer is not lower than the tax rates prescribed under 115A(1) of the Act.

Now, therefore, a non-resident taxpayer shall not be required to file tax return in India if the following conditions are cumulatively satisfied:

(i) The total income consists of dividend or interest income as referred to in clause (a), or royalty or FTS income of the nature specified in clause (b) of section 115A(1) of the Act; and

(ii) Tax on such income has been withheld at source under the provisions of Chapter XVII-B, at the rates which are not lower than the prescribed rates under section 115A(1) of the Act.

The aforesaid amended provisions are proposed to be applicable w.e.f. assessment year 2021-22 i.e. financial year 2020-21.

Observations/ Comments

  • The proposed amendment, aimed at reducing the compliance burden of non-resident taxpayers in India, shall inch up the Government’s ‘Ease of doing business’ initiative.
  • Under the amended provisions of section 115A of the Act, a non-resident taxpayer would still be required to file income tax return in order to avail the benefit of provisions of the Treaty, inter alia, for

– lower tax rate provided in the Treaty
– non-application of surcharge and/ or education cess, which is otherwise leviable under the Act;
– benefit of ‘make available’ clause or performance rule provided in the Treaty;
– benefit of Article 7 (Business Profits) where the tax treaty does not contain FTS clause and such company does not have permanent establishment in India.

  • The proposed amendment will bring a relief to non-residents based in Australia, Belarus, Brazil, Bulgaria, Canada, Denmark, Jordan, Kyrgyz Republic, Mauritius, Mongolia, Nepal, Oman, Philippines, Poland, Turkey, United Kingdom and United States where the tax rate in case of ‘royalty’ prescribed in the respective Tax Treaties is higher than the rate prescribed in the Act.
  • In case of non-residents based in Belarus, Bulgaria, Denmark, Jordan, Kyrgyz Republic, Mongolia, Oman, Poland, Spain, Turkey, United Kingdom and United States, the amendment would be beneficial if they derive income in the nature of FTS since the tax rate prescribed in the respective Tax Treaty is higher than the rate provided in the Act.
  • The proposed amendment would also be beneficial for residents of Australia, Canada, United Kingdom and United States in case the benefit of ‘make available’ clause available in the respective Tax Treaty is not to be availed in respect of income earned by way of FTS.
  • In a case where the Indian payer has withheld tax at source at a higher rate, for instance, where the non-resident has not obtained a Permanent Account Number (“PAN”) in India, such person shall be required to file income tax return in case the excess tax withheld is sought to be claimed as refund.
  • In several cases, considering the onerous consequences of non-withholding of tax at source, the Indian payer, in respect of issues that are controversial, may have withheld tax even when there was no obligation to do so to avoid litigation. For instance in case of reimbursement of expenditure, payment for purchase of standardised software, recharge of expatriates’ salary, etc. In such cases too, the non-resident person shall be required to file income tax return in order claim refund of tax withheld at source.
  • In some cases the foreign tax authorities may require the non-resident to furnish a copy of the Indian income tax return for allowing claim of foreign tax credit qua taxes withheld in India. This may be required to ensure that such person has not claimed refund of tax withheld in India.
  • The amended provisions of section 115A have increased compliance burden for a non-resident who earns income in the nature of ‘interest’ and/or ‘dividend’ and wish to avail the benefit of a tax treaty. For instance, as per the existing provisions, a UK company deriving interest income on monies lent to an Indian company covered under section 115A(1)(a)(ii) shall be exempt from filing tax return as per the existing provisions if the Indian payer has withheld tax at source at the tax rate of 15% prescribed under the India-UK Tax Treaty [as against the tax rate of 20% plus applicable surcharge and cess prescribed under the Act]. However, as per the amended provisions, the UK company would now be required to file tax return in India since the withholding tax rate as per India-UK Tax Treaty is lower than the rate prescribed under the Act.
  • As per the existing provisions of the Act [section 115-O] an obligation is cast on every Indian company to pay Dividend Distribution Tax (“DDT”) on profits distributed by way of dividend and the sum received by the shareholder (resident/ non-resident) is exempt from tax. The Finance Bill, 2020 has proposed to abolish the DDT and revert to the classical system of taxing dividend in the hands of respective shareholders. Section 115A provides a tax rate of 20% in case of dividend income as against rate of 5%/10%/15% in various Tax Treaties. Therefore, in order to claim benefit of lower tax rate available in the tax treaty, going forward, the foreign company shall be required to file a tax return in India. Further, it shall be mandatory to file tax return in cases where the tax is withheld by the Indian company at the beneficial rate prescribed in the Tax Treaty, which requirement did not exist under the present law.
  • Further, the Indian company paying ‘dividend’ shall be required to withhold tax at source under section 195 at the rate of 20% (for non-resident Indian)/ 30% (in case of other non-residents and LLP)/ 40% (in case of foreign companies) increased by applicable surcharge and cess. However, such non-resident is liable to pay tax on dividend income at the rate of 20% in terms of section 115A of the Act. Therefore, non-resident taxpayers, in order to claim refund of excess withholding taxes, shall be required to file tax return in India even in cases where tax is withheld at source at the rates prevailing under the Act.
  • Under the proposed regime, no relaxation has been provided in respect of transfer pricing compliances. Accordingly, the foreign company shall still be required to file transfer pricing certificate in Form 3CEB, prepare and maintain transfer pricing documentation prescribed under section 92D.
  • The due date of filing Form 3CEB has been advanced to 31st October from 30th November each year.
  • In cases where the foreign company is not required to file income tax return in India, it is advisable that sufficient documentation viz. invoices, withholding tax certificates, underlying agreements, etc. are maintained each year. This will help the companies to effectively respond to any queries raised by Indian tax authorities.
  • The exclusion of cases to which the proposed amendment is sought to be made inapplicable, i.e. where the non-resident claim relief under a Tax Treaty, is in line with the principal purpose test introduced in Article 7 of the Multilateral Instrument. The Government intends to maintain record of such cases so as to be able to scrutinize them, if needed.

For any details and clarifications, please feel free to write to:
Ms. Shaily Gupta : [email protected]
Mr. Akshay Uppal : [email protected]