Importers and exporters have a new problem. They have to submit a Chartered Accountant (CA) certificate regarding tax deduction at source (TDS), before making remittances to non-residents.
Reserve Bank of India (RBI), vide its AP (DIR) circular no. 03/2007-08 dated 19.07.2007, has clarified that a remitter of foreign exchange is required to submit to the authorised dealer, an undertaking and CA certificate in the format prescribed by Central Board of Direct Taxes (CBDT) vide circular No. 10/2002 dated October 9, 2002 at the time of making the remittance in foreign exchange to non-residents including remittances which are in the nature of trade transactions such as import payments.
The issue regarding tax deduction at source has a fair history. Prior to 8th November 1997, a No Objection Certificate (NOC) was required from Income Tax authorities before allowing remittances to non-residents. The CBDT issued circular No.759 dated 18.11.1997 dispensing with that requirement and remittances were allowed against an undertaking accompanied by a CA certificate. RBI circulated the formats through AD (MA) circular no. 48 dated 29.11.1997.
However, the certificates were issued prescribing TDS in certain cases where tax was liable to be deducted or prescribing TDS at a lower rate than was payable on the basis of the provisions of the Income Tax Act and the applicable Double Taxation Avoidance Agreements. The format of the certificates did not provide for necessary details or the reasons for adopting a certain rate for TDS. This resulted in unnecessary calling of information from the assessees at a later stage and thus gave rise to grievances on the part of the tax-payers. Therefore, in order to streamline the procedure as well as to ensure the correct TDS, the CBDT revised the formats of the undertaking and CA certificate. RBI circulated the revised formats vide its AP (DIR) circular no. 56/2002-03-RB dated 26.11.2002.
Even so, queries persisted from authorised dealers as to whether such undertaking and certificate should be obtained in all cases of remittances in foreign currency to non-residents including remittances for trade payments.
On the basis of the communication received from CBDT, RBI has now clarified that under Section 195 of the Income Tax Act read with Rule 29B of the IT Rules, any person responsible for making payment to a non-resident or to a foreign company, any interest or any other sum chargeable under the IT Act, shall at the time of payment or credit of the amount deduct Income Tax thereon at the rate in force. Section 195 of the IT Act is not limited to interest income and it takes into account business income also, says the RBI. Further, points 7 and 8 of the CA certificate deal with remittances for supply of articles or things (plant, machinery, equipment, etc.) or computer software or business income, says RBI.
The importers and exporters have to now run after their CA for certificates for every remittance of income of non-residents and that adds to the transaction costs and also practical difficulties. It would be better if such certificates are dispensed with for small remittances below a threshold limit and if only consolidated periodic certificates are called for. It is a matter for the Commerce Minister to take up with the Finance Minister in the interest of cutting transactions costs of importers and exporters.