Tax on international payments as per Income-tax Act, 1961

Introduction

As we all know there is a rapid increase in overseas remittances by us for consultancies, or other things like education, travel, investments, gifts, and other business purposes, everything regarding taxation on it is governed by section 206C(1G) of the Income-tax Act, 1961.

The main objective is not collecting or applying taxes on payments but it is to track high-value foreign remittances and maybe increasing liquidity for government, but it is not to create a new tax cost.

However, I saw many clients are confused regarding payment of TCS on international payments, leading to excess collections, litigations, and even compliance issues, it came especially after recent rate changes.

In this article I had explained the law so that this confusion can be mitigated, covering the case laws, and analyses the consequences of non-collection or short collection of TCS with judicial precedents, but expecting that it is not taken as a legal advice and taken as an educational purpose.

Analysis of Section 206C(1G)

TCS is required to be collected by authorised dealer banks as per Foreign Exchange Management Act, 1999 (FEMA), or a seller of overseas tour program packages

We must note that authorised dealer as per FEMA means a bank, financial institution, or any other person who is authorised by the RBI under the FEMA to deal in foreign exchange or foreign securities, It’s appointed for formation of the legally recognised channel through which foreign currency transactions like import and export payments, remittances abroad, receipt of foreign funds, and related compliances can take place in a protected manner.

transactions covered as per this section is the remittance under Liberalised Remittance Scheme (LRS), and sale of overseas tour program package

As per LRS, under FEMA, an Indian resident can remit up to USD 250,000 per financial year for permitted purposes such as education, medical treatment, travel, maintenance of relatives abroad, gifts, investments in interalia shares, property, etc, the TCS is triggered at the time of remittance through the authorised dealer bank.

TCS Rates as on date of this article

Remittances under LRS (other than education & medical)

Education & Medical Remittance

Overseas Tour Program Package

We will later get credit for TCS in our income tax return at the time of filing and in case you don’t fall in the tax brackets, then you may claim for it’s refund.

Nature of TCS

TCS is not income tax liability, rather it’s only a collection mechanism that is adjustable against final tax payable or refundable, this principle has been consistently upheld by courts in multiple contexts relating to TDS/TCS.

Here, I will discuss one such case law Hindustan Coca Cola Beverages Pvt. Ltd. v. CIT having citation 293 ITR 226 (SC) here Supreme court held that TDS/TCS provisions are only a machinery for collection of tax and do not create an independent income-tax liability. Where the recipient of income has already discharged the tax liability, the payer cannot be treated as an assessee in default, though interest for delay may still be leviable. This judgment clearly establishes that TCS is not a final tax but merely a collection mechanism, adjustable against the final tax payable or refundable, and the Revenue cannot recover the same tax twice.

Though section 206C(1G) is relatively new, courts have laid down important principles under general TCS/TDS jurisprudence, which squarely apply here.

TCS Is a machinery provision and not a charging section

It’s the supreme court’s principle, that means machinery provisions cannot create a tax liability where none exists. Here, the courts have held that TCS provisions cannot override the charging sections and in case the recipient’s income is not taxable, TCS cannot be treated as tax payable

This principle helps taxpayers claim refunds of excess TCS.

Also, there is no TCS where the transaction is not covered by the law, that means in most of the cases as per section 206C like that of scrap, minerals, liquor, etc, courts ruled that literal interpretation is mandatory and if transaction does not strictly fall within the section, TCS cannot be enforced. This principle applies to incorrect classification of remittance, wrong treatment of capital account transactions and incorrect tagging as “overseas tour package”

Courts have repeatedly held if tax has ultimately been paid by the assessee and there is no loss to the revenue, then the penalties and harsh consequences should not be imposed. This doctrine is critical in non-collection or short-collection cases.

Consequences of non-collection or short collection of TCS

Deemed assessee in default as per Section 206C(6A), that means if the collector fails to collect TCS, then he may be treated as assessee in default. However, relief is available in case the remitter has filed return of income, taken the amount into account, paid due taxes and have provided a CA certificate. The courts have consistently granted relief where substantive tax compliance exists.

Interest liability as per section 206C(7) is leviable at 1% per month or part thereof, this is from the date TCS was collectible till actual payment, also as per the law, the interest is mandatory, but should be computed only up to the date of tax payment by the assessee, not beyond.

Penalty proceedings may be initiated as per section 271CA in case of failure to collect TCS, the penalty is equal to amount of TCS not collected. However, courts have held that the penalty is not automatic, there is a reasonable cause under section 273B protects the assessee and a bona fide interpretation of law is a valid defence

Prosecution

Although prosecution provisions exist, the courts have repeatedly observed that technical or venial breaches without intent to evade tax should not attract prosecution.

Practical issues

Recently there was the advisory case in our STS Ventures, where our client had misclassified the purpose of remittance he made the investment by purchasing a house in UAE but it was wrongly treated as tour package and the remittance treated as LRS, which we advised client to correct the return and to pay adequate tax with interest. This was because department is using AI to catch such things.

What’s issue if assessee is getting refund? It is the high TCS rate of 20% in few cases, cash flow blockage and the delay in refunds, hence the courts have recognised cash flow hardship as a relevant factor in granting relief.

Illustration based on the practical example of a client I got in my firm- STS Ventures

Facts of the case an Indian corporate received an invoice from a foreign consultant, dated 25 October 2025, amounting to say USD 10,000, nature of payment was the fees for technical services (FTS), as we know the applicable TDS under section 195 is 10% + surcharge & cess (or we can take it as subject to DTAA or Income tax rate whichever is lower.

Due to internal approvals, remittance is proposed on 10 November 2025, in this case The client informs me that “We will deduct TDS at the time of remittance in November, Please issue Form 15CB accordingly.”

As per section 195(1), TDS is required to be deducted “At the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier.”, and the issue was this was the final invoice and not the performa invoice. Therefore, we advised that the TDS liability legally arises in October, not November.

In my client’s case, can he TDS at the time of remittance instead?

Here the banks insist at the time of form 15CA/15CB at the time of remittance, but the clients often delay TDS deduction and say it will be deducted along with remittance. However, legally deducting TDS in November does not change the fact that TDS ought to have been deducted in October, and this delay can trigger interest as per section 201(1A). Percentage of interest you may comment below.

Note: form 15CB is a CA certificate confirming the nature of remittance, taxability under the Income-tax Act, DTAA applicability, rate of TDS, and the amount of TDS deducted / to be deducted

Hence STS Ventures advised him to identify the earlier of credit or payment and to deduct TDS at the time of booking the invoice and if deduction is delayed then he must quantify interest proactively and deposit TDS before due date to avoid disallowance and mention the correct facts in Form 15CB as the form 15CB does not cure delayed TDS and marly the bank compliance don’t mean that you are complying with the provisions of Income-tax act correctly.

Responsibility of Chartered Accountant in foreign remittance matters

It is to be noted that the CA is not liable for client’s default or even in ED cases of FEMA or PMLA for submitting wrong information, CA is liable to take documents from clients and should believe them to be true unless he have a reason to believe that it’s forged or so, in short if CA is accepting documents in good faith then he wouldn’t be liable for FEMA or PMLA.

There is a common misconception among authorities and clients is that, “Since the CA issued Form 15CB, the CA is responsible for any non-deduction, short deduction, or delayed deduction of tax.” This understanding is legally incorrect.

CA’s protection in case of income tax or ED proceedings

Position in Enforcement Directorate (ED) or in the case of the FEMA cases, the primary responsibility is on the remitter or the authorised dealer (i.e. bank), or as discussed above. Professionals are examined only for facilitation or knowledge, not for default itself unless it is proved that the CA knowingly assisted in furnished false certification, or was involved in active concealment, else if CA worked in good faith then no liability can be fastened on the CA and the mere issuance of Form 15CB does not amount to abetment, But a proper due diligence is expected from a CA.

A CA is considered to have discharged professional duty if the following are maintained on record, documentary proof, written client representation and a written confirmation that TDS will be deducted as advised, any delay is client-driven and the CA is not responsible for execution. This representation is critical evidence in ED and tax proceedings.

It is on a legal principle that no vicarious liability without mens rea or a guilty mind, as the courts have repeatedly held vicarious liability cannot be imposed on professionals, There must be Mens rea, active participation and the knowledge of illegality. A professional opinion, even if later disputed, cannot be criminalised.

Conclusion

TCS on international payments under section 206C(1G) is a reporting and tracking mechanism, not a new tax. Courts have consistently held that substantive tax liability prevails over procedural lapses, no penalty should arise without revenue loss or mala fide intent and bona fide errors deserve relief

For taxpayers and authorised dealers alike, correct classification, documentation, and timely compliance are the keys to avoiding litigation. And from a CA’s perspective, proactive advisory and client education can significantly reduce disputes, refund delays, and unnecessary hardship.

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For Professional queries, the author can be contacted at stsventures99@gmail.com