The Finance Bill has proposed limited number of amendments to pertaining to non-residents as discussed hereinbelow:

1. Interest on NRE and FCNR accounts

   Proposed Amendments

   Interest earned by a non-resident individual on money standing to his credit in Non-Resident (External) (NRE) Account is exempt under section 10 (4) of the Income-tax Act (the Act). Similarly, interest on Foreign Currency Non-Resident (FCNR) Account is exempt under section 10 (15) (iv)(fa) of the Act. The Finance Act (No.2) 2004 had restricted exemptions under both these Sections up to 31st March, 2005. The Finance Bill, 2005 proposes to remove this restriction and restore the exemption beyond 31st March, 2005.

   Implications

   The proposal is a great relief for NRIS who otherwise would have paid huge sum of tax. Although levy of tax would have resulted in substantial tax collection (estimated to well over Rs.1000 crores), the rational for continuing the exemption seems to be to reward NRIs, taking into account their social, cultural and emotional links to India who have proved to be friends in case of needs, especially during the foreign exchange crisis faced by India in early nineties.
    

2. Lease of Aircraft and Aircraft Engines

   Proposed Amendments

   Income earned by a foreign enterprise (i.e., person who is a non-resident) from lease of an aircraft or an aircraft engine is exempt u/s 10(15A) in respect of agreements made or entered into on or before 31st March, 2005. The Finance Bill proposes to extend the date from 31st March, 2005 to 30th Sept. 2005.

   Implications

   Lease income in respect of an agreement made or entered into from 1st Oct. 2005 would be taxable in India. However, section 10(6BB) has been amended to provide that where an Indian Company makes payment of taxes (for such lease payments) on behalf of such Foreign Enterprise grossing up of tax would not be required.
    

3. Tax Rate on Royalties and Fees for Technical Services

   Proposed Amendments

   Royalties and Fees for Technical Services received by a non-resident in pursuance of an agreement made by him with an Indian concern or Government of India is taxed at following rates
   u/s 115A of the Act.

   1. Agreement made on or before 31st May, 1997 30%
   2. Agreement made after 31st May 1997 20%

   The Finance Bill proposes to reduce the rate to 10 per cent in respect of agreement made on or after 1st June, 2005.

   Implications

   This is a welcome amendment and it will put the Act at par with many recent Double Taxation Avoidance Agreements (DTAA) which provide for 10% tax on Royalties and Fees for Technical Services. However, one may note that the rate prescribed under a DTAA would be final and need not be further increased by surcharge and education cess, whereas the effective rate (inclusive of surcharge and education cess) under section 115A (after the amendment) would be 10.46 per cent (assuming that the recipient is a company).

   It may be noted that the rate of tax is linked to the date of agreement. Therefore, even if the payment is made today (14th March, 2005) in respect of an agreement which was made say, on 14th March, 1997, then the applicable rate of tax would be 30% and not 10%. It would have been better if the rate of tax were linked to the date of payment rather than the date of agreement, as India’s DTAAs with major trading partners provide for 10 per cent tax on Royalties and Fees for Technical Services.