The Finance Bill 2013 memorandum read out the amendment in s.115A as under:
Section 115A of the Income-tax Act provides for determination of tax in case of a non-resident taxpayer where the total income includes any income by way of Royalty and Fees for technical services (FTS) received under an agreement entered after 31.03.1976 and which are not effectively connected with permanent establishment, if any, of the non-resident in India. The tax is payable on the gross amount of income at the rate of
(i) 30% if income by way of royalty or FTS is received in pursuance of an agreement entered on or before 31.05.1997;
(ii) 20% if income by way of royalty or FTS is received in pursuance of an agreement entered after 31.05.1997 but before 01.06.2005; and
(iii) 10% if income by way of royalty or FTS is received in pursuance of an agreement entered on or after 01.06.2005.
India has tax treaties with 84 countries, majority of tax treaties allow India to levy tax on gross amount of royalty at rates ranging from 10% to 25%, whereas the tax rate as per section 115A is 10%. In some cases, this has resulted in taxation at a lower rate of 10% even if the treaty allows the income to be taxed at a higher rate.
In order to correct this anomaly, the tax rate in case of non-resident taxpayer, in respect of income by way of royalty and fees for technical services as provided under section 115A, is proposed to be increased from 10% to 25%. This rate of 25% shall be applicable to any income by way of royalty and fees for technical services received by a non-resident, under an agreement entered after 31.03.1976, which is taxable under section 115A.
This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
The bill has been passed by the Parliament and necessary amendment in s. 115A is since made effective 1.4.2014. The hike in rate from 10% to 25% is therefore adjudged to so the called anomaly between rates of tax in the Income tax Act and the tax treaties. It is somehow suggested in the budget memoranda that the rate of tax under the IT Act cannot be lower than the treaty rates. This kind of approach goes contrary to the provisions of section 90 (2) of the Income tax Act, 1961 that aims to provide benefits to non-residents of treaty countries and limits application of the Income tax Act rates only when they are more beneficial to them. Sub-section (2) of s. 90 in this regard specifically so provide as under:
‘(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.’
By making an amendment in s. 115 A the Government has indirectly taken away the benefit of lower taxation to non-residents of countries where the negotiated rate under the double taxation treatise is higher than that provided in the Act.
In the right course it is the duty of the Government to renegotiate the rate of tax under the treaty with countries where the rate of tax exceeds that under the Income tax Act. In fact in almost all treaties that have been signed in the past eight years the rate of tax on royally and FTS has been agreed at 10%in sync with that under the Act. Instead of renegotiating the rate of tax in the treaty the government has escalated the rate of tax in the Income tax Act only because in one off countries such as Bulgaria- 20% ( 9.5.1996 ), Greece- 30%( 17.3.1967 ), Denmark-20% (25.9.1989 ), Italy- 20% (25.4.1996 ), Jordan-20% ( 8.12.1999 ), Kenya – 20% (20.8.1985), Libya-30% (1.7.1982), Mongolia -25 ( 16.9.1996), Poland-22.5% (12.2.1990), Romania-22.5% 8.2.1988), Spain-20% (21.4.1995 ), Tanzania-20% ( 16.10.1981), Egypt-30% ( 30.10.1995), the rate of tax is then pegged at 20%-30%.
Another facet of this blind step is that this amendment has lead to retrospective change since all agreements and contracts that have been in force as on 31.3.2013 whether entered on or after 31.5.1997 or before 1.6.2005 or 31.3.2013 will be cornered with higher rate of 25% even when the rate prevailing on the date of agreement in their case may have been 20% or 10% , as the case may be. It is but for sure that royalty and FTS are kind of payments that spread over a longer period of time in case of project set up and installations especially in turnkey contracts where payments are made on several stages in which case they would suffer dual or in some cases triple rates of tax which is totally irrational and unjustifiable.
It is the settled legal position that the substantive amendment is normally prospective unless stated otherwise. In other words it is a settled law that no burden can be imposed on the assessee from the back date. The Bombay High Court in Vijaya Silk House (Bangalore) Ltd. v. Union of India (2012) 349ITR566 held that a retrospective operation can be given only if it is for the benefit of assessees and not in a case where it affects even a small section of assessees. In the present facts the substantive amendment in s. 115 A only on the basis of some treaties having prescribed higher rate than that under the Income tax Act is belittling this well laid down law as it goes adverse to assessees. The amendment in s.115A is not clarificatory in nature hence it cannot alter the position in so far as tax liability arising under the old agreements having effect as on 1.4.2013.
Basically when the Government saw its defeat in Union of India v. Azadi Bachao Andolan (2003) 263ITR706 it has been time and again bringing in new amendments in sections as well as adding new chapters to plug the ruling of the Apex Court which said that a taxpayer is entitled to so adjust affairs as to reduce tax burden. In came TRC amendments in s. 90 in 2012 requiring a non-resident to get a perfect TRC on eight parameters and since that was cumbersome the provision is lifted in 2013 yet it had put deep burden upon non-residents for one full year 2012-13 who had to pay taxes under the I T Act on being technically disqualified from meeting the stricter TRC norms.
Whereas the Government has shooed the difficult TRC pick and brought in a simpler procedure it has on the other hand increased the rate of tax in the Income tax Act, 1961 so that if a non-resident fails to get a TRC he would have to pay more taxes then that under the treaty. This goes directly in contra to s. 90 (2) which advocate application of the Act provisions only to the extent they are more beneficial to him.
Thus it is fairly proper that the Government renegotiate those treaties where the rate of tax on royalty and FTS originally fixed exceed 10% such as Bulgaria- 20%, Greece- 30%, Denmark-20% , Italy- 20%, Jordan-20%, Kenya – 20%, Libya-30% , Mongolia -25, Poland-22.5%, Romania-22.5%, Spain-20%, Tanzania-20%, Egypt-30%, Australia. Brazil, Cyprus, USA, UK, Korea, Indonesia, Mauritius, Nepal, Philippines, Thailand, Turkey, Oman, Mangolia, Malta -15% rather than increasing the domestic rate scheme. It is not fair to tax a non-resident at a rate higher than the rate prescribed in the treaty for whatever reasons. In the alternate the amendment in. s 115A may be re-casted to have application only viz a viz new agreement signed on or after 1.4.2013 so as to have only prospective effect.