Section 115A: Tax on Dividends, Royalty, Technical Service Fees for Foreign Companies

Section 115A of the Income Tax Act outlines the taxation of dividends, royalty, and technical service fees applicable to non-resident individuals, non-resident companies, and foreign companies. It majorly outlines what would be considered as income, how different incomes would be charges and rate at which tax is to be paid on each Income.

115A Amendment: Finance Bill 2023 (Updated)

• The rate of withholding tax for Fees for Technical Services (FTS) or Royalty is changed to 20% plus Education cess and surcharge (20.8%). The old rate was 10% + Cess and surcharge
• DTAA rate can be adopted provided foreign company is filing income tax return in India, if the DTAA rates are more beneficial than the 115A tax rates.

Section 115A of Income Tax Act, 1961

115A (1) Where the Total Income of:

(a) a non-resident (not being a company) or of a foreign company, includes any income by way of—

• (i) dividends other than dividends referred to in section 115-O ; or
• (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency not being interest of the nature referred to in sub-clause (iia) or sub-clause (iiaa); or

• (iia) interest received from an infrastructure debt fund referred to in clause (47) of section 10; or

• (iiaa) interest of the nature and extent referred to in section 194LC; or
• (iiab) interest of the nature and extent referred to in section 194LD; or
• (iiac) distributed income being interest referred to in sub-section (2) of section 194LBA;

• (iii) income received in respect of units, purchased in foreign currency, of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India,

The Income Tax Payable shall be Aggregate of:

(A) The amount of income-tax calculated on the amount of income by way of dividends other than dividends referred to in section 115-O, if any, included in the total income, at the rate of twenty per cent;

(B) The amount of income-tax calculated on the amount of income by way of interest referred to in sub-clause (ii), if any, included in the total income, at the rate of twenty per cent;

• (BA) The amount of income-tax calculated on the amount of income by way of interest referred to in sub-clause (iia) or sub-clause (iiaa) or sub-clause (iiab) or sub-clause (iiac), if any, included in the total income, at the rate of five per cent;

(C) The amount of income-tax calculated on the income in respect of units referred to in sub-clause (iii), if any, included in the total income, at the rate of twenty per cent ; and

(D) the amount of income-tax with which he or it would have been chargeable had his or its total income been reduced by the amount of income referred to in sub-clause (i), sub-clause (ii), sub-clause (iia), sub-clause (iiaa), sub-clause (iiab), sub-clause (iiac) and sub-clause (iii) ;

(b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (1) of section 44DA received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,—

• (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of 37[ten] per cent;
• (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of 37[ten] per cent; and
• (C) the amount of income-tax with which it would have been chargeable had its total income been reduced by the amount of income by way of royalty and fees for technical services.

Explanation for the Purposes of This Section

• (a) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
• (b) “foreign currency” shall have the same meaning as in the Explanation below item (g) of sub-clause (iv) of clause (15) of section 10;
• (c) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
• (d) “Unit Trust of India” means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963).

(1A) Where the royalty referred to in clause (b) of sub-section (1) is in consideration for the transfer of all or any rights (including the granting of a license) in respect of copyright in any book to an Indian concern or in respect of any computer software to a person resident in India, the provisions of sub-section (1) shall apply in relation to such royalty as if the words the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy occurring in the said clause had been omitted :

Provided that such book is on a subject, the books on which are permitted, according to the Import Trade Control Policy of the Government of India for the period commencing from the 1st day of April, 1977, and ending with the 31st day of March, 1978, to be imported into India under an Open General License :

• Provided further that such computer software is permitted according to the Import Trade Control Policy of the Government of India for the time being in force to be imported into India under an Open General License.
• Explanation 1.—In this sub-section, “Open General License” means an Open General License issued by the Central Government in pursuance of the Imports (Control) Order, 1955.
• Explanation 2.—In this sub-section, the expression “computer software” shall have the meaning assigned to it in clause (b) of the Explanation to section 80HHE.

(2) Nothing contained in sub-section (1) shall apply in relation to any income by way of royalty received by a foreign company from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1976, if such agreement is deemed, for the purposes of the first proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976; and the provisions of the annual Finance Act for calculating, charging, deducting or computing income-tax shall apply in relation to such income as if such income had been received in pursuance of an agreement made before the 1st day of April, 1976.

(3) No deduction in respect of any expenditure or allowance shall be allowed to the assessed under sections 28 to 44C and section 57 in computing his or its income referred to in sub-section (1).

(4) Where in the case of an assesses referred to in sub-section (1),—

• (a) the gross total income consists only of the income referred to in clause (a) of that sub-section, no deduction shall be allowed to him or it under Chapter VI-A;

(b) the gross total income includes any income referred to in clause (a) of that sub-section, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assesses.

(5) It shall not be necessary for an assesses referred to in sub-section (1) to furnish under sub-section (1) of section 139 a return of his or its income if—

• (a) his or its total income in respect of which he or it is assessable under this Act during the previous year consisted only of income referred to in clause (a) of sub-section (1); and
• (b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

Section 115A Analysis [Key Takeaways]

• The withholding tax rate for Fees for Technical Services (FTS) or Royalty has been changed. The new rate is 20% plus Education cess and surcharge, resulting in an effective rate of 20.8%. The previous rate was 10% plus Cess and surcharge.
• If a foreign company is filing an income tax return in India, it can choose to adopt the rates specified in the Double Taxation Avoidance Agreement (DTAA) if they are more beneficial than the tax rates mentioned under Section 115A.
• The section defines various types of income, such as dividends, interest, and income from units of Mutual Funds, and specifies the applicable tax rates for each category.
• The section also provides explanations for terms used, such as “fees for technical services,” “foreign currency,” “royalty,” and “Unit Trust of India.”
• Certain deductions and allowances under other sections of the Income Tax Act are not allowed when computing the income referred to in this section.
• It states that if an assessee’s total income consists only of income mentioned in clause (a) of sub-section (1), no deduction under Chapter VI-A is allowed. If the gross total income includes such income, the deduction under Chapter VI-A is allowed after reducing the gross total income by the amount of that income.
• An assessee referred to in this section is not required to file an income tax return if their total income consists only of income mentioned in clause (a) of sub-section (1) and the applicable tax has been deducted at source as per the provisions of Chapter XVII-B.

FAQs About Section 115A Income Tax Act

Q1. What is Section 115A of Income Tax Act amendment 2023?

Section 115A of the Income Tax Act amendment in 2023 brings about changes in the withholding tax rates for Fees for Technical Services (FTS) or Royalty. The new rate is set at 20% plus Education cess and surcharge, resulting in an effective rate of 20.8%. Previously, the rate stood at 10% plus Cess and surcharge. Additionally, the amendment allows for the adoption of Double Taxation Avoidance Agreement (DTAA) rates, provided that the foreign company is filing an income tax return in India. This option is available when the DTAA rates prove to be more advantageous compared to the tax rates specified under Section 115A.

Q2. What is the rule 115A method of conversion?

Section 115A provides the method of conversion under by which capital gain is to be calculated for Non-Residents under the Proviso to Section 48.

Q3. What is the exemption granted by Section 115A 5?

Section 115A(5) of the Income Tax Act grants an exemption to non-resident taxpayers receiving dividend and/or interest income. They are relieved from the obligation to file a tax return in India if the tax on that income has been withheld by the payer in accordance with the provisions of the Act.