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Press Releases from the Embassy
Japan-India
Relations
Press Release No.14 |
Amendment
to Income Tax Treaty between Japan and the Republic
of India
- Withholding tax rates on dividends, interests, royalties and
FTS will be reduced to 10%
- Long-awaited amendment after 1989’s amendment
NEW DELHI: May 29, 2006 |
The
Government of Japan and the Government of India
today exchanged diplomatic notes indicating both
countries’ legal approval on the Protocol amending
the Income Tax Treaty between Japan and the Republic
of India. The Notes to this effect were signed and
exchanged between H.E. Mr. Yasukuni Enoki, Ambassador
of Japan to India, and Ms. M.H. Kherawala, Chairperson,
Central Board of Direct Taxes, at a ceremony held
in the Ministry of Finance, New Delhi..
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Negotiation
Process
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Following
instructions given in January 2005 by the Finance
Ministers of the Government of Japan and the Government
of the Republic of India, that Income Tax Treaty
be revised, negotiations between both countries
started in February 2005, and in October 2005 an
agreement in principle has been reached. The signing
of the Protocol took place on 24th February 2006
between H.E. Mr.Taro Aso, Minister for Foreign
Affairs of Japan, and H.E. Mr.M.L.Tripathy, Ambassador
of India to Japan.
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Outline
of the new Tax Treaty
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Reflecting
the importance of the growing economic relationship
and to promote bilateral investment between the
two countries, the Protocol will partially amend
the current Income Tax Treaty. The Protocol would
reduce the withholding tax rates to 10 per cent
on dividends, interests, royalties and fees for
technical services paid between the two countries.
At the same time, it would eliminate the provision
on the tax sparing credit. |
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Date
of enforcement
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Amendment
to the Income Tax Treaty shall enter into force
on the thirtieth day after the date of the Exchange
of Notes, which is 28th June. The amendment
shall be applicable from:
In
Japan
I |
With
respect to taxes withheld at source, for amounts
taxable on or after 1st July 2006. |
II |
With
respect to taxes on income which are not withheld
at source, as regards income for any taxable
year beginning on or after 1st January
2007. |
In
India
I |
With
respect to taxes withheld at source, for amounts
paid or credited on or after 1st April
2007. |
II |
With
respect to taxes on income for any previous
year beginning on or after 1st April
2007. |
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Benefits
to both economies
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| Although
India’s IT industry has achieved rapid strides
of growth internationally in recent years,
its growth in Japan has not been so impressive.
The high rate of 20% withholding tax on Fees
for Technical Services (FTS) was a big deterrent
to the industry’s progress. With the agreement
between the two countries to reduce the withholding
tax from 20% to 10%, we can now expect the
Indian IT industry to attain a higher percentage
of growth in its business in Japan as well.
It should be noted that Japanese companies
operating in India are also beneficiary of
this tax reduction regarding FTS.
The
Japanese investment in India since the
late nineties has recorded a steady growth
compared to the past. This trend is expected
to accelerate consequent to reduction of
withholding tax. Therefore, the present
amendment of tax treaty is considered to
be very crucial for further expansion of
bilateral trade and investment leading
to strengthening of Japan-India economic
relationship.
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