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FPIs opting not to file tax returns in India may need to cough up more

As per most of the tax treaties, tax rate on royalties and technical fees paid to investors outside India is at 10%. Tax experts say that as per the finance bill, foreign cos who have tax withheld at a rate less than that specified in section 115A (10.6%/10.9%) would not be able to benefit from the exemption from filing of tax returns, extended in this budget.

, ET Bureau|
Last Updated: Feb 07, 2020, 11.36 AM IST
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Foreign portfolio investors (FPIs), private equity (PE) funds and multinationals pay 10% tax under most tax treaties and will end up paying 0.92% more if they choose not to file returns.
Mumbai: Foreign investors may now have to choose between paying additional taxes and not face harassment from the taxman or stick to paying lower taxes and continue with scrutiny from the taxman.

The government, in the recent budget, announced that foreign investors can opt not to file tax returns in India if they let go of tax treaty benefits. As per most of the tax treaties, tax rate on royalties and technical fees paid to investors outside India is at 10%. Tax experts say that as per the finance bill, foreign companies who have tax withheld at a rate less than that specified in section 115A (10.6%/10.9%) would not be able to benefit from the exemption from filing of tax returns, extended in this budget.

"In a majority of the cases, the actual withholding rates are less that those prescribed under the Income-tax Act and would tend to be the tax treaty rate (mostly 10%) which doesn't include surcharge and cess. Companies having low taxable income from India may ask their clients to deduct the TDS (tax deducted at source) at the higher rate and not the treaty rates to escape from compliance of filing tax returns in India,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.

Foreign portfolio investors (FPIs), private equity (PE) funds and multinationals pay 10% tax under most tax treaties and will end up paying 0.92% more if they choose not to file returns. An additional 0.92% means a cost leading to millions of dollars for most investors, say industry trackers.“The recent change in the finance bill would mean that any foreign investor including FPIs, multinationals or PE funds will have two choices –– either take advantage of the double tax avoidance agreements (DTAA) and pay 10% (and file tax returns) or not file returns and pay 10.92% (0.92% more tax). The tax arbitrage will become huge for several companies as royalties and technical fees could be huge for many of them,” said Amit Singhania, partner at Shardul Amarchand Mangaldas.

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