Finance Bill 2023: Domestic royalty tax doubled to 20%

The Finance Bill, which contains proposals related to taxation and government spending, was passed with several amendments. Representative image

The Lok Sabha on March 24 passed the Finance Bill 2023. With this, the proposed amendment of increasing royalty tax (contractual payment for using assets of another entity) to foreign companies got the Parliament's nod.

As per amendments to the Finance Bill, the rate of tax on royalties and fees from technical services earned by non-resident foreign firms has doubled from 10 percent to 20 percent, CNBC-TV18 reported.

The Finance Bill, which contains proposals related to taxation and government spending, was passed with several amendments. Besides, 20 more sections were added to the Bill.

Also read: Lok Sabha passes finance bill 2023 amid din. Here are the highlights

Until now, the treaty rate and the domestic tax rate were the same at 10 percent. As a result, several companies were able to skip the trouble of claiming treaty benefits such as additional income tax return (ITR) filing, special forms, etc.

However, with the domestic royalty tax rate being doubled, companies will have to start complying with additional filing requirements to make sure they avail of the treaty route.

CNBC-TV18 quoted Saurrav Sood, Practice Leader of International Taxation at SW India, as saying that the increase in the royalty tax rate will lead to increased withholding of tax obligations on payments to be made to non-residents if there is no tax treaty benefit reducing the rate.

He said: “In a typical example of payments made to US companies, the rate of withholding tax on royalty and fees for technical services under the tax treaty was 15 percent. However, Indian companies while making such payments used to take benefit of a lower rate as per the domestic tax act. Now, where such rate under the domestic tax act has been increased to 20 percent, such benefit shall not be available.”