India and Japan have exchanged diplomatic notes indicating legal approval of the protocol amending the income tax treaty between the two nations, which gives a tax boost to software firms doing business in both countries.
The diplomatic notes were signed and exchanged between India's Central Board of Direct Taxation Chairperson M. H. Kherawala and Japanese ambassador Yasukuni Enoki.
One of the major changes brought about by the amended treaty is a cut in withholding tax on fees for technical services, to 10% from 20%.
Software companies and trade associations from India had lobbied the government hard for a tax cut during the treaty negotiations, arguing that the former tax rate, considered high in comparison to other bilateral double taxation avoidance agreements, was a big deterrent to the development of the software industry in India.
However, it is thought that the amended treaty will also be crucial in helping to expand bilateral trade and investment between the two nations in general.
"The Agreement will stimulate the flow of capital, technology and personnel from India to Japan and vice-versa. It will provide tax stability and also reduce any obstacles for providing mutual cooperation," explained an Indian cabinet statement released in February, shortly after ministers approved the text of the renegotiated treaty.
The new agreement also sees withholding tax on dividend and interest income earned from cross-border investments cut to 10%.
Formerly, the withholding tax rate on dividend income stood at 15%, while the tax rate for interest income is 10% for banks and 15% for other companies.
In Japan, the amendment will be in effect from July 1 this year with respect to taxes withheld at source, and in India from April 1, 2007.
The amendments will come into force from January 1 next year with respect to taxes on income not withheld at source in Japan, and from April 1 next year in India.
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