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.