Monisha Jain

The Financial Budget 2013 bringing in many changes that are proposed to be implemented from 1st April, 2013 has bought in serious issues to be looked for and analysed by the tax regulators and experts.

Section 195 of the Income Tax Act, 1961 states that: The income earned by non-residents in the form of royalties, technical fees etc. is subjected to TDS by the person who is responsible to make such payment to the non-resident Assessee. The section doesn’t mention any rate at which the TDS is to be done by the person liable to make the payment. Thus for the rate we refer to the section prescribed for the same i.e. Section 115A. Section 195 states that such a  income is to be taxed at the higher of the following rates:

     a. The Rate in Force.

     b. The rate given under Section 115A.

     c. Section 206AA- 20% for non-PAN card holders.

Previously the rate prescribed in this section was 10% which was similar to the rate given in the treaty between India and the foreign nations (most of the treaties give the rate of 10%). This rate was reasonable for the following reasons:

  1. This rate wasn’t contradicting the rate as given by the treaty.
  2. In case of a non-resident not holding a PAN he was covered under Section 206AA by which the rate applicable to the income earned by the assessee was 20%.

Thus incase of a assesse not having his PAN, which is considered to be a mandatory requirement for all assessed under the Act  a higher rate of 20% is prescribed. This is a penalising provision for non-compliance with the mandatory requirement.

The abvove explanation stands redundant and loses its basis due to the recent amendment which raiss the rate given under Section 115A  from 10% to a hike of 25%. This unruly hike has bought in various criticisms of which the most important are listed above.

This amendment would have been appreciated if there would be a simultaneous rise in the corresponding section i.e. Section 206AA. But as there has been no such amendment the penalty which was enforced to penalize the non-PAN card holders which is a mandatory requirement for being assessed has now become a easier way than the actual rate in case the assessee  is covered by the rate under Section 115A. Thus, there is a need to revise or relook at the amendment proposed through the Finance Budget 2013. So that this doesn’t become a source for the non-residents to be discouraged to hold a PAN.

The government must penalize the people not holding a PAN so that the tax evasion can be checked by way of the PAN which has an account of all the income earned by the assessee.

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Tags : Monisha Jain (7) pan number (260) Section 206AA (33) TDS (925)

One response to “Section 115A recent amendment, the logic & reasoning behind it vague?”

  1. Ruchi Chaturvedi says:

    aaplicable rate for 2016-17 u/s 115A

  2. Rajendra says:

    Hi,

    Is section 115A also include payment of Professional fee to a Non resident who is having Tax residency certificate.

  3. rahul says:

    Dear Sir/Mam

    We have to make payment to our NRI Agent USD 5,000/- towards “Sales Commission on Export Sales” in Dubai, UAE. kindly advise me TDS Liability as per the provisions of Income Tax Act, 1961 & Compliance w.r.t form 15CA &
    15CB for the same

    Kindly reply me as soon as possible.

  4. vikash shrivastava says:

    what should be gross %

  5. Daxesh Soni says:

    I reproduce your query herein below:
    “How much TDS I have to pay in case where i am paying management fees to my Germany based head quater for some formulations”. Rate of tax as per DTAA with Germany is 10%,

    So i want to know that what will be the TDS rate u/s 195 if the foreign company does not having PAN?

  6. paresh says:

    We are dealing with foreign entity in case of royalties, FTS currently tax rate are increased to 25% from 10% w.e.f.01.04.2013 my query is in the absence of pan what is tax applicable u/s 206aa suppose we are dealing with US Firms where DTAA rate 15% & client provides Tax residency certificate to us in the format specified by income tax
    please elaborate tax rate for following tax calucation

    . the rate prescribed in the Act;(please specify rate)
    • at the rate in force i.e., the rate mentioned in the Finance Act;
    or(please specify rate)
    • at the rate of 20%.

  7. Bikram says:

    a person from philipins a person from philippins is giving consultancy services to indian company; there is no specific provision in DTAA regarding FTS; pls any body tell me at which rate TDS to be deducted to be deducted

  8. paresh says:

    My opinion,this amendment going to be affect only the NON Resident who does not have PAN card in India and Indian company who made agreement with Non resident to bear the WHT cost

    I have query regards to rates in case of payment to us non resident without pan no holding & holding tax residency certificate & payment relating to royalty,fees for technical services

    1) what is rate specified in the relevant provision of this act after 01.04.2013

    2)what the rate in force (rate as per data 15% or rate as per 115a 25% whichever lower)
    kindly give us opinion at what rate we deduct tds (25%+sc+cess or 20% rate as deducted by us before 01.04.2013)

  9. sunil says:

    reading all of the above, would somebody comment on – if the tax it deducted at highest rate say 25% taking into account 115A, 206AA and DTAA for payment of technical fee to a DTAA country without having the PAN no. of receiver then will department issue the TDS certificate for such receiver to claim the exemption in his country under DTAA. I hope I am clear?

  10. Amit Jain says:

    Sec 206AA has overriding effect on all the income tax section including Sec 90(2). Non resident who does not have PAN will suffer 25% TDS.
    Pls. correct me if i am wrong with reasons.

  11. Pravin says:

    Good article Ms.Monisha.

    Mr Ramaswamy – i have three doubts here. One – If the rates in force does not include Sec.115A rates (as pointed out by Mr.Devang and indeed this rate of 25% to be applied for non-DTAA countries), then we need not worry about 206AA at all since most of the services are taxable under DTAA which has rates of 10-15%. The 15CB certificate can cover the payment under relevant DTAA and deduct tax as per DTAA. TRC to also be obtained from payee. Is this position correct?

    Two – I read a view that if payment is covered under DTAA, then 206AA will not apply nor will 139A enforcing application for PAN. If payment cannot be covered under DTAA but under the wider Sec.9 of IT Act, only then we need to apply rate under 115A and compare with 206AA rate.

    Three – do we have to include SC + Cess on the 25% rate? Can we not ignore it since tax deduction for domestic payments exclude necessity to deduct sc + cess. Thanks.

  12. Ramasamy says:

    Hi Monisha

    Increase in the rate u/s 115A would not majorly affect the PAN holder as more than 96% of our tax treaty with other country has maximum rate 10% or 15% except few country where rate is 20%. So pan holder can still avail the benefit given under section 90 (2)and pay tax to the extent of treaty rate provided that they have valid Tax residency certificate otherwise they can’t enjoy the treaty rate beneift. The only advantage available for non resident pan holder is whatever tax paid by them in india can be claimed by them in their home country while filing their annual return based on the WHT certificate issued by the indian company however non pan holder can’t get WHT certificate from their indian company even after paying tax.

  13. monisha jain says:

    Mr. Ramasamy
    The facts that you have mentioned are true but when a nri doesn’t hold a pan he must be penalized for it whereas according to the recent amendment the higher rate seems to be applicable on a person holding a pan. This is as per my understanding of the amendment please correct me if I’m wrong as I’m a student still in the process of learning.

  14. Kamal Virani says:

    I appreciate the posting above.
    I believe if the NRI who Holds Pan, he shall also be filing returns.
    Excess Taxes deducted shall anyways be taken care off in returns.

    Kamal

  15. Mohit says:

    Hi Everybody,

    I think that Mr. Ramasamy is correct as the effective rate of deduction u/s. 206AA would be 25% being higher of rate in force (25%) & 20%.

    The only disgusting feature is that person with no PAN would be penalized at par with those having PAN, in case person is not covered by any DTAA.

    But the situation where a person will not be covered by any DTAA is rare as India has DTAA with more than 188 countries.

  16. Mohit says:

    Hi Everybody,

    I think that Mr. Ramasamy is correct as the effective rate of deduction u/s. 206AA would be 25% being higher of rate in force (25%) & 20%.

    The only disgusting feature is that person with no PAN would be penalized at par with those having PAN, in case person is not covered by any DTAA.

  17. K K SARAOGI says:

    Dear Kunal A.,

    I reproduce your query herein below:

    “How much TDS I have to pay in case where i am paying technical charges to a consultant based in China for some formulations”.

    Rate of tax as per DTAA with China is 10%, therefore, tax is deductible @10% only and no surcharge and EC is applicable if rate of tax as per DTAA is prescribed as 10%.

    If there is no PAN of the non-resident, you will have to follow the provisions of Sec.206AA and deduct tax specified in the relevant provision of the Act. Hence, you will be required to deduct tax @25% + Surcharge and EC as applicable. However, surcharge shall be applicable if the payment/credit exceeds or expected to exceed the specified limit.
    The provision is very harsh as it nullifies the provisions of DTAA only because of non-possession of PAN which not a requirement of DTAA.

  18. Devang Shah says:

    Monisha,

    For the sake of clarity, I wish to highlight that under Section of 195 of the Income-tax Act, 1961 (Act), a person deducts income-tax at the ‘rates in force’. Further, Section 2(37A) of the Act defines ‘rates in force’ to inter alia mean the rate or rates of income-tax specified in the Finance Act of the relevant year or the rate or rates of income-tax specified in DTAA.

    It is Part II of the First Schedule of the Finance Act (and not Section 115A of the Act) which provides for the ‘rates in force’ for deduction of income-tax under Sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Act.

  19. K K SARAOGI says:

    Dear Monisha Jain,
    The rate prescibed under Sec.206AA becomes redundant in case tax is applicable under Sec.115A, that too, if there is no DTAA. In case, there is DTAA and rate is lower than 20% and the non-resident is not PAN card holder, the provision of Sec.206AA shall still apply.

    Regards,

    K.K.Saraogi

  20. Kunal A. says:

    Hi

    I am non finance person and need to know how much TDS I have to pay in case where i am paying technical charges to a consultant based in China for some formulations.

    Kindly send me response for the same.

    Thank you !!

    Kunal S.

  21. CS Anand Khandelwal says:

    Monica has rightly said that the proposed amendment to raise the TDS rate for NRI u/s 115A from 10% to 25%, without proposing any corresponding amendment in Section 206AA, would lead to a kind of incentive for not holding PAN by NRI and will amount to penalise those who are giving the true statement of their income in India by having PAN in India. The Govt. need to revisit the proposed amendment in toto.

  22. Anandan says:

    Madam

    The article is a good one

  23. ramasamy says:

    Hi Monisha

    I don’t think rate increased in Sec 115A would affect any NON Resident who has PAN card in India. When Non Resident has PAN card, he can choose benefit given under section 90(2) ( ie Treaty rate or rate given in domestic act whichever lower ).

    In my opinion,this amendment going to be affect only the NON Resident who does not have PAN card in India and Indian company who made agreement with Non resident to bear the WHT cost. The reason is rate under section 206AA should be higher of following three

    (i) at the rate specified in the relevant provision of this Act; or

    (ii) at the rate or rates in force; or

    (iii) at the rate of 20%.”

    Earlier rate specified in the relevant provision of the act and rate in force were lesser than the 20% so we deducted TDS @ 20% u/s 206AA for all Non resident and resident who does not have PAN but now after the amendment rate in force has been increased to 25% so we have to deduct TDS @ 25+SC.Ecess under section 206AA.

    Please correct me if i stated anything wrong.

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