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Tax treaty relief at the time of TDS under section 196A of the Act – Budget 2023

Section 196A of the Act provides for TDS on payment of certain income to a non-resident (not being a company) or to a foreign company, at the rate of 20%. The income is required to be in respect of units of a Mutual Fund specified under clause (23D) of section 10 of the Act or from the specified company referred to in the Explanation to clause (35) of section 10 of the Act.

2. Representations have been received requesting that the benefit of tax treaty may be considered at the time of TDS so that if the treaty provides a rate lower than 20%, TDS is made at that lower rate.

3. In order to provide the relief requested by taxpayers, it is proposed to insert a proviso to sub-section (1) of section 196A of the Act. This proviso seeks to provide that the TDS would be at the rate which is lower of the rate of 20% and the rate or rates provided in agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A of the Act, in case of a payee to whom such agreement applies and such payee has furnished the tax residency certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A of the Act.

7. This amendment will take effect from 1st April, 2023.

[clause 87]

Extract of relevant clause of Finance Bill 2023

Clause 87 of the Bill seeks to amend section 196A of the Income-tax Act relating to income in respect of units of non-residents.

Sub-section (1) of the said section provides for deduction of tax on payment of any income to a non-resident, not being a company, or to a foreign company in respect of units of a Mutual Fund specified under clause (23D) of the section 10 or from the specified company referred to in the Explanation to clause (35) of the said section at the rate of twenty per cent.

It is proposed to insert a proviso to the said sub-section so as to provide that where an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent. or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.

This amendment will take effect from 1st April, 2023.

Extract of Relevant Amendment Proposed by Finance Bill, 2023

87. Amendment of section 196A.

In section 196A of the Income-tax Act, in sub-section (1), the following proviso shall be inserted, namely:–

“Provided that where an agreement referred to in sub­section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub­section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent. or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.”.

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Source : Finance Bill 2023 / Union Budget 2023

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