Strengthening Bilateral Relations: India's Tax Reforms with Spain
In a significant development aimed at enhancing economic ties and promoting bilateral trade and investment, the Government of India (GOI) has issued a notification to reduce tax rates applicable to royalty and Fees for Technical Services (FTS) under the Double Taxation Avoidance Agreement (DTAA) with Spain. This amendment, effective from the fiscal year 2023-24, underscores India's commitment to fostering economic cooperation with Spain and creating a conducive environment for mutual economic growth and partnership between the two nations.
Key Provisions and Context:
Reduced Tax Rates:
The Ministry of Finance has announced a reduction in the tax charged on royalties and FTS under the India-Spain DTAA. The amended Article 13(2) now stipulates that the tax shall not exceed 10% of the gross amount of royalties or FTS, provided the recipient is the beneficial owner. This modification aligns the rates for royalties and FTS, eliminating the earlier distinction where equipment-related royalties were capped at 10% and other royalties and FTS were taxed at up to 20%.
Invoking the Most Favoured Nation (MFN) Clause:
Central to this development is the invocation of the MFN clause. The MFN clause in the India-Spain DTAA ensures that Spain receives the same beneficial tax treatment that India offers to the most favoured nations with which it has trade agreements. This clause stipulates that if India enters a DTAA with an OECD member country providing a lower tax rate, the same rate should apply to the India-Spain DTAA. Consequently, since India agreed to lower tax rates on royalties and FTS in its 1996 Convention with Germany, an OECD member, these reduced rates now extend to Spain.
Background of the DTAA:
The DTAA between India and Spain has been in force since January 12, 1995. Comparatively, the DTAA between India and Germany, which served as a benchmark for this amendment, came into effect on October 26, 1996. Germany's status as an OECD member at the time helped the application of the MFN clause to the India-Spain DTAA.
Objective and Benefits:
The primary aim behind this amendment is to enhance bilateral economic relations between India and Spain. By reducing tax rates on royalties and FTS, the GOI aims to incentivize businesses and investors from both countries to engage in cross-border transactions. The expected outcomes include:
1. Increased Trade and Investment:
Lower tax rates make investments in royalties and FTS more attractive, fostering a conducive environment for increased trade and investment between the two countries.
2. Technology and Knowledge Transfer:
The reduction in tax rates is expected to ease the transfer of technology, knowledge, and expertise, which is crucial for fostering innovation and economic growth.
3. Enhanced Economic Cooperation:
Strengthening the overall economic ties between India and Spain, potentially leading to more robust and diversified economic collaboration.
Implications and Legal Framework:
The notification signifies India's strategic intent to promote favourable international trade and investment conditions. The Central Board of Direct Taxes (CBDT) had previously issued a clarificatory circular laying down the conditions to avail the benefit of the MFN clause. Additionally, the recent Supreme Court decision in the Nestle SA case emphasized that the MFN clause benefits are not automatic and require legislative action through a notification. This ensures a transparent and systematic approach to implementing such amendments.
Expert Opinions:
Industry experts have welcomed this move, highlighting its alignment with earlier legal interpretations and the CBDT's 2022 circular.
Ashish Karundia, Founder of Ashish Karundia & Co., “noted that the notification streamlines the tax treaty following the MFN clause.”
Yashesh Ashar, Partner at Illume Advisory, “emphasized that the amendment aligns with the intent to provide fair tax treatment across OECD member countries.”
Detailed Analysis of the Amendment:
| Article 13(2) of India-Spain DTAA | Tax Rate on Equipment-Related Royalties | Tax Rate on Other Royalties and FTS |
|---|---|---|
| Pre-Amendment | Capped at 10% of the gross amount | Capped at 20% of the gross amount |
| Post-Amendment | Uniform tax rate capped at 10% of the gross amount (if the recipient is the beneficial owner) | Uniform tax rate capped at 10% of the gross amount (if the recipient is the beneficial owner) |
Implementation and Compliance:
The amended tax rates under the India-Spain DTAA are effective from the fiscal year 2023-24, applicable from the assessment year 2024-25. This change requires businesses and tax professionals to update their compliance practices accordingly.
Tax Refunds
Taxpayers who have had tax deducted at source at rates exceeding 10% in the fiscal year 2023-24 can claim a refund of the excess TDS by filing their income tax return. This provision ensures that businesses and individuals receive help from the reduced tax rates without facing undue financial burden.
Conclusion:
The reduction of tax rates on royalties and FTS under the India-Spain DTAA, facilitated by invoking the MFN clause, marks a significant step in India's efforts to strengthen its economic ties with Spain. This strategic move is expected to spur bilateral trade, investment, and economic cooperation, leading to mutual benefits for both nations. The amended tax rates will be applicable from the assessment year 2024-25, signalling a new era of enhanced economic collaboration between India and Spain.
Nestle SA case:
The recent Supreme Court of India decision in AO v. M/s Nestle SA has changed the interpretation of tax treaties. The Court ruled that benefits like lower tax rates or limited scope from one treaty cannot be automatically applied to another through a Most Favoured Nation (MFN) clause unless India issues a separate notification.
The case arose when the Delhi High Court allowed a 5% tax rate from the India-Slovenia treaty to apply to the India-Netherlands treaty via the MFN clause. The Income Tax Department argued that this clause requires a separate notification under Section 90 of the Income Tax Act, 1961, and is only valid if the other country was an OECD member at the time of the treaty.
The Supreme Court agreed, stating that the MFN clause needs a separate notification to apply, and benefits only apply if the other country was an OECD member when the treaty was signed.
Source: NOTIFICATION F.NO.225/72/2024IITA-II
Disclaimer:
“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”
Author:
Prerana
Prepared On:
20/03/25
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