Understanding the Sixth Schedule of Income Tax Act 1961

Introduction

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Hi, my name is Shruti Goyal, I have been working in the field of Income Tax since 2011. I have a vast experience of filing income tax returns, accounting, tax advisory, tax consultancy, income tax provisions and tax planning.

The Income Tax Act 1961 is the primary law governing the taxation of income in India. It provides a framework for assessing, collecting, and enforcing taxes on individuals, businesses, and other entities. One of the key components of the Act is the Sixth Schedule, which deals with the taxation of income from royalties and fees for technical services paid to non-residents.

In this blog post, we will take a closer look at the Sixth Schedule of Income Tax Act 1961, exploring its purpose, provisions, and impact on taxpayers. Whether you are a taxpayer, tax professional, or simply curious about India’s tax system, this post will provide valuable insights into this important aspect of the Income Tax Act.

What is the Sixth Schedule of Income Tax Act 1961?

The Sixth Schedule of Income Tax Act 1961 deals with the taxation of income from royalties and fees for technical services paid to non-residents. It was introduced in 1976 to address concerns about the erosion of India’s tax base due to the payment of royalties and fees for technical services to non-residents.

The Schedule defines “royalties” as payments made for the use or right to use any intellectual property, such as patents, trademarks, copyrights, or software. “Fees for technical services” refer to payments made for services that involve the application of technical or specialized knowledge and skills, such as consulting, engineering, or technical assistance.

Provisions of the Sixth Schedule of Income Tax Act 1961

The Sixth Schedule of Income Tax Act 1961 contains several provisions that govern the taxation of royalties and fees for technical services paid to non-residents. Here are some of the key provisions:

Taxation of royalties

• Royalties paid to non-residents are subject to a withholding tax of 10% of the gross amount paid.
• The tax is withheld at the time of payment and remitted to the government by the payer.
• If the recipient of the royalties is a resident of a country with which India has a tax treaty, the tax rate may be reduced to the rate specified in the treaty.

Taxation of fees for technical services

• Fees for technical services paid to non-residents are subject to a withholding tax of 10% of the gross amount paid.
• The tax is withheld at the time of payment and remitted to the government by the payer.
• If the recipient of the fees for technical services is a resident of a country with which India has a tax treaty, the tax rate may be reduced to the rate specified in the treaty.

Obligations of the payer

• The payer of royalties or fees for technical services to non-residents is responsible for withholding and remitting the tax.
• The payer must obtain a Tax Deduction and Collection Account Number (TAN) and use it to file TDS returns and remit the tax.
• Failure to withhold and remit the tax can result in penalties and interest.

Obligations of the recipient

• The recipient of royalties or fees for technical services must file an income tax return in India.
• The recipient must also obtain a Permanent Account Number (PAN) and provide it to the payer to avoid higher withholding tax rates.
• Failure to file an income tax return can result in penalties and interest.

FAQs

Q. What is the purpose of the Sixth Schedule of Income Tax Act 1961?

The purpose of the Sixth Schedule is to ensure that income from royalties and fees for technical services paid to non-residents is subject to taxation in India. This helps to prevent the

erosion of India’s tax base and ensures that non-residents are contributing their fair share of taxes.

Q. How does the Sixth Schedule impact taxpayers?

Taxpayers who pay royalties or fees for technical services to non-residents must withhold and remit the tax under the Sixth Schedule. This adds a compliance burden on the taxpayer, but failure to comply can result in penalties and interest. For non-resident recipients of these payments, the Sixth Schedule requires them to file an income tax return in India and obtain a PAN, which can also be a compliance burden.

Q. Are there any exemptions or deductions available under the Sixth Schedule?

The Sixth Schedule does not provide any exemptions or deductions for royalties or fees for technical services paid to non-residents. However, if the recipient is a resident of a country with which India has a tax treaty, the tax rate may be reduced as per the treaty provisions.

Q. Can the payer claim credit for the tax withheld under the Sixth Schedule?

Yes, the payer can claim credit for the tax withheld under the Sixth Schedule against their income tax liability.

Conclusion

The Sixth Schedule of Income Tax Act 1961 is an important provision that governs the taxation of income from royalties and fees for technical services paid to non-residents. It ensures that such income is subject to taxation in India, preventing the erosion of India’s tax base. Taxpayers who pay royalties or fees for technical services to non-residents must comply with the provisions of the Sixth Schedule, including withholding and remitting the tax, obtaining a TAN, and filing TDS returns. Non-resident recipients of these payments must file an income tax return in India and obtain a PAN. Understanding the Sixth Schedule is essential for all taxpayers and tax professionals operating in India’s tax system.