Finance Bill 2023: Royalty tax paid by Indian firms to foreign companies hiked to 20%

With changes, companies will have to comply with a lot of additional filing requirements to ensure they avail the treaty route as the domestic royalty tax rate has been doubled.

According to Saurrav Sood, Practice Leader of International Taxation at SW India, this increase in rate will lead to a higher rate of withholding tax obligations on payments to be made to non-residents unless there is a tax treaty benefit which reduces such rate.

"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," Sood said.

Additionally, where even if a tax treaty benefit is taken when such a non-resident will file an income tax return in India, the differential tax will be required to be paid at the time of filing of return of income.