In 1976, the Indian government enacted a domestic tax law imposing a tax on the payment of royalties and fees for technical services (FTS) through withholding taxes at rates of 40% and 20%, respectively.
The withholding tax rate on royalties and FTS payments to nonresidents was reduced to 10% between 1986 and 2005 to reduce the cost of technology for Indian companies.
However, India’s tax treaties with the United States and the United Kingdom stipulated that royalty and FTS withholding rates were to be 15% (other member nations of the Organization for Economic Cooperation and Development had tax treaties with a withholding rate of 10%.)
This favorable withholding tax rate of 10% for royalties and FTS under the domestic Indian tax law resulted in many U.S.- and U.K.-based companies seeking benefits under the domestic Indian tax law, rather than their respective tax treaties.
Prior to April 1, 2023, nonresident companies could obtain the favorable withholding tax benefit of 10% by providing the Indian payor with the following:
- Name, email address, and contact phone number
- Address
- Government-issued tax residency certificate from a non-Indian country
- Non-Indian government-issued tax identification number
On April 1, 2023, the Indian government increased the royalty and FTS withholding tax rate to 20%. The increase in this withholding tax rate could lead many nonresident taxpayers to seek the now favorable withholding tax rate under their respective tax treaties rather than the domestic law.
Requirements of tax residency certificate for obtaining tax treaty benefits
The Indian government has made it mandatory for nonresident taxpayers who earn income from India and are seeking to claim benefits under a tax treaty provide the following documents to the Indian payer:
Valid tax residency certificate (TRC) from their respective government agency
Completed Form 10F and No Permanent Establishment declaration
Compliance requirements under the tax treaty
India compliance requirements
All nonresident taxpayers that wish to obtain tax treaty benefits will have to perform the following activities:
- Obtain a TRC.
- Prepare and submit a No Permanent Establishment declaration.
- File Form 10F electronically on the income tax web portal.
- This process could take approximately three weeks to complete.
- File a tax return in India.
- This process will require the nonresident to obtain a Permanent Account Number (PAN). This process could take approximately one month to complete.
- The tax return filing process could take approximately three to four weeks to complete.
U.S. compliance considerations
Tax residency certificates in the United States can be obtained from the Internal Revenue Service approximately 45 days from the application date. Organizations that have a multitiered pass-through structure may take longer to process as each members’ signature is required as part of the TRC application process.
Complications regarding Form 10F
Form 10F is a self-declaration form completed by a nonresident taxpayer receiving income from Indian companies.
Prior to July 2022, the nonresident taxpayer was required to provide the TRC and Form 10F either in physical or electronic form to the Indian payer to obtain tax treaty benefits at the time of withholding. These documents were retained by the Indian taxpayers and furnished to the tax authorities upon request or during a tax audit.
However, in July 2022, the Indian Tax Administration mandated that nonresident taxpayers are required to file Form 10F electronically in the income tax e-filing portal along with a valid TRC to obtain tax treaty benefits. The goal of this mandate was to allow the Indian government to monitor nonresident organizations’ sources of income within India.
Until recently, a PAN was required to access the Indian income -tax web portal to perform this e-filing. The Indian tax authorities have made changes to the Indian income tax web portal to allow nonresident taxpayers to electronically file Form 10F without obtaining PAN.
How taxpayers should proceed
Nonresident taxpayers who receive income in India should carefully consider the impacts of seeking preferential withholding tax rates for royalty and FTS payments in India. Although a lower withholding tax rate may seem appropriate, the cost of documentation and filing requirements may outweigh the lower tax rate.
