From Yatin’s Desk: Non-resident taxpayers get partial breather from filing Indian tax returns

Filing of Indian income tax return by non-residents earning passive income in the nature of royalty, fee for technical services (FTS) and interest, subjected to WHT in India, has been a sore point for non-resident tax payers. Such taxpayers either being oblivious of the requirement or otherwise regarding such compliance as an unnecessary burden, in many instances have not been filing the tax return in India. The Government over the last 2-3 years has been focusing on ensuring compliance, even going to the extent of issuing notices for reassessment and making penal provisions stringent to enforce compliance by delinquent tax payers. In a reversal, the Finance Bill (FB) 2020 now proposes to exempts non-residents from tax filing obligation, though with limitations.

Under the extant provisions, non-resident tax payers earning interest and dividend income are exempted from filing tax returns provided appropriate WHT has been deducted [at rate applicable under Double Tax Avoidance Agreement (DTAA) or domestic tax law Рas beneficial]. Tax payers earning FTS & royalty income are mandatorily required to file tax return, even if income has been subject to WHT. FB 2020 proposes to materially change this requirement by providing the non-residents an exemption from tax filing in relation to FY 2019-2020 and subsequent years. The exemption will be available where the income is in the nature of royalty/FTS (taxable on gross basis), interest and dividend and WHT has been deducted at the rate prescribed under the domestic tax law (Act), if higher than the rate applicable under DTAA.

For instance, WHT rate for Royalty/FTS in most DTAA is 10% vis-à-vis 10.92% (for foreign companies) under the Act. The exemption from filing will be applicable if WHT has been made at 10.92%. While difference is not stark with respect to Royalty/FTS and non-residents may perhaps consider WHT deduction at higher rate to avail the benefit, adopting the same approach for interest and dividend income will have its limitation. General rate of WHT applicable on interest/dividend income is  21.84% (peak rate for foreign companies) as against 10%/15% applicable under most DTAA [certain categories of interest income is subject to lower WHT of 5% under Act e.g. interest on foreign currency loan, rupee denominated bonds, etc.]. Significant difference in WHT rates would be a dampener leaving non-resident tax payers with limited scope of benefiting from the proposed non-filing regime.

The budget proposal has made a cross-over perhaps benefiting non-resident tax payers earning FTS/royalty income (given lower arbitrage between domestic and DTAA WHT rates) while obligating those earning interest/dividend income to file tax return if they wish to take benefit of lower rates under DTAA. The provisions also leave another area unaddressed i.e. with regard to undertaking transfer pricing compliance even where there is no filing obligation (in absence of specific carve out). Non compliance has significant penal implications.

The Government has apparently taken back, to an extent, what it proposed to give by way of relief to non-resident taxpayers. It may not be ease of compliance yet !