Budget brings cheer to foreign firms

FOREIGN ENTERPRISES

In the article published in this column on February 7, 2005, a recommendation was made for reduction in the rate of tax on the income by way of royalty and fees for technical services received by foreign companies from Indian residents.

The rationale of the recommendation was that the tax of 20 per cent was introduced in 1997 when the foreign companies were taxed at 55 per cent.

However, despite the reduction of corporate tax from 55 per cent to 42 per cent, there is no change in the rates applicable for royalties, etc.

In the majority of tax treaties India has signed with other countries after 1993, the tax on royalty and fees for technical services has been prescribed at 10 to 15 per cent as against the normal rate of 20 per cent applicable in other cases.

It is heartening to note that Finance Minister P Chidambaram has accepted the recommendation and has, accordingly, proposed to modify Section 115A of the Income-Tax Act in this regard.

As a matter of fact, while moving the Finance Bill 2005, the minister observed that "to encourage technical upgradation, I propose to reduce the withholding tax on technical services from 20 per cent to 10 per cent".

The existing provisions of Section 115A provide for the rates at which income-tax shall be payable where the total income of a non-resident or a foreign company includes any income by way of royalty or fees for technical services received from the government or an Indian concern in pursuance of an agreement made by the foreign company with the government or the Indian concern after March 31, 1976.

Where such agreement is with an Indian concern, it should be approved by the central government, and where it relates to a matter included in the industrial policy of the Indian government, the agreement should be in accordance with that policy.

Under the existing provisions, the royalty or fees for technical services received in pursuance of an agreement made on or before May 31, 1997 is taxable at the rate of 30 per cent and where such royalty or fees for technical services is received in pursuance of an agreement made after May 31, 1997, the same is taxable at 20 per cent.

The Budget proposes to amend clause (b) of sub-section (1) of Section 115A so as to reduce the tax rate from 20 per cent to 10 per cent on royalty received in pursuance of an agreement made on or after June 1, 2005.

It is further proposed to reduce the tax rate from 20 per cent to 10 per cent on fees for technical services received in pursuance of an agreement made on or after June 1, 2005.

It is also proposed to make amendments in Part II of the First Schedule to the Finance Bill, 2005 reducing the rates for deduction of tax at source in the case of royalty or fees for technical services from 20 per cent to 10 per cent.

These amendments will take effect from April 1, 2006 and will, accordingly, apply in relation to the assessment year 2006-2007 and subsequent years.

In the context of these amendments, it may be noted that the reduced rates of tax will apply only in respect of royalty and fees of technical services received in pursuance of an agreement made on or after June 1, 2005.

Therefore, foreign companies will be well advised to take note of the cut off date and try and enter into such agreements only after May 31, 2005.

agar@nda.vsnl.net.in