Overview of TDS on Non Resident Payments
Provisions for Deduction of Tax at source in case of payments to non-residents is covered under section 195 of the Income tax act 1961 which are as below.
SECTION 195 (1)
Payments to any
- Non-Resident (not being a company).
- Foreign Company.
- Any interest.
- Any other sum chargeable under the provisions of this act (including reimbursements).
- Interest on securities.
- Sum chargeable under the head ‘salaries’.
- Dividends on which dividend distribution tax has been paid.
- Interest on approved foreign currency loans obtained by Indian company.
- Interest from infrastructure debt fund.
TIME OF DEDUCTION
The payer shall deduct income tax thereto at the rates in force
At the Time of credit to the account of the payee
At the Time of payment to the payee
Whichever is earlier.
In the case of interest payable by the government or public sector bank or public financial institutions in respect of notified mutual funds, Tax shall be deducted only at the time of payment.
SECTION 195 (2)
Whole of the amount paid/credited shall be the assessable value for deduction of income tax.
Where the person responsible for paying any such sum chargeable under this Act, to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under only on that proportion of the sum which is so chargeable.
APPLICATION BY PAYER TO AO
No Form is prescribed, plain paper application to be made.
No time limit is prescribed for passing an order by AO.
Order may be special or general.
LOWER/NIL DEDUCTION OF TAX
Any person entitled to receive any interest or other sum on which income tax has to be deducted under the said section, may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax.
APPLICATION BY PAYEE TO AO
- Application to be made by payee for the grant of a NIL Certificate.
- For receipt of interest or other sum on own account and not on behalf of Head Office or any other branch situated outside India without Tax Deduction.
- Application in prescribed Form
- Banking Company –Form 15 C
- Any other Person –Form 15 D
Branch of a Foreign Bank – Interest on regular loans or Credit Cards.
- Any other person
- Must be a regular assesse – regular in payment of tax, etc.
- Business in India for more than 5 years and having assets in India amounting to at least Rs. 50 lakhs.
- Must be a Non Defaulter/not subjected to penalty.
DIFFERENCES BETWEEN SECTIONS 195(2), 195(3) & 197(1)
SECTION 195 (4)
VALIDITY OF THE CERTIFICATE
A certificate granted (for lower/nil deduction) shall remain in force till;
Expiry of the period specified therein
Till the cancellation by the Assessing Officer.
Whichever is earlier
SECTIONS 195 (5), 195 (7)
POWERS OF CBDT
- The Board may, make rules specifying the cases in which, and the circumstances under which, and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith by notification in the Official Gazette.
- The Board may, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted, on that proportion of the sum which is so chargeable.
SECTION 195 (6)
OBLIGATIONS OF THE PAYERS
The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed (from 15 CA / CB).
FORM 15 CA / CB
Certificate of Foreign Remittances by CA’s
- Form 15CA is a Declaration of Remitter and is used as a tool for collecting information in respect of payments which are chargeable to tax in the hands of non-resident recipient.
- Chargeability can be ascertained and certified by obtaining the Certificate from a Chartered Accountant in Form no. 15CB. This an alternate channel of obtaining Tax clearance apart from Certificate from Assessing Officer.
- Form 15CB is the Tax Determination Certificate where the Issuer CA examines the remittance having regard to chargeability provisions under Section 5 and 9 of Income tax Act along with provisions of Double tax Avoidance Agreement with Recipient’s Residence Country.
RULES FOR FILLING FORM 15CA
No information is required to be furnished for any sum which is not chargeable under the provisions of the Act, if,—
(i) The remittance is made by an individual and it does not require prior approval of Reserve Bank of India as per the Foreign Exchange Management Act, 1999.
(ii) the remittance is of the nature specified as per rule 37BB
RULES FOR FILLING FORM 15CB
- In order to fill in form 15 CB the taxpayer must add a chartered accountant by logging into his id on income tax website and entering the membership number of the chartered accountant. Once the taxpayer adds the CA, the CA can file Form 15CB in behalf of the Taxpayer.
- Also the chartered accountant has to get himself registered under ‘tax – professional’ on e-filing website.
- After CA uploads Form 15CB, the Assesse can view the uploaded FORM 15CB form e-filing website
- On successful filing of Form 15CA-Part C against the particular Form 15CB, the status of Form 15CB shall update as “Consumed”.
♦ SECTON 195A
Grossing up for computing TDS to be done in cases where the payer bears the tax liability
♦ SECTION 206AA
Any person entitled to receive any sum or income or amount, on which tax is deductible, shall furnish his Permanent Account Number to the person responsible for deducting such tax.
♦ SECTION 90
Nonresident must produce tax residency certificate to avail DTAA (Double taxation avoidance agreement) benefits.
Tax Residency certificate (TRC) is the certificate duly verified and issued by the Government of the country of which NR claims to be a resident for the purpose of tax. The TRC certificate can be obtained from the Government or Tax authorities of the particular country of NR.
- Supporting documents to ascertain/ authenticate –
- Legal status of the payee
- Details of the Beneficial ownership, if other than the recipient
- Nature of income & its categorization e.g. Royalty, FTS, Business Income, etc.
- Residential Status –Both under the Act & DTAA
- Existence of Business Connection (BC)/ Permanent Establishment (PE)
- Taxability & rate of withholding –Both under the Act & DTAA
- Exchange rate –as provided under rules 115/115A
- Copy of Invoice, Agreement, if any, Correspondence or any other document which is helpful in determining true character of the remittance
- No Business Connection/Permanent Establishment declaration
- Tax Residency Certificate (TRC) –if DTAA benefits are claimed.
- Certified copy of PAN
- Declaration that the non-resident taxpayer is the beneficial owner of income
- Extracts of accounting entry showing actual deduction of tax
- Copy of challan of payment of tax.
PROCEDURE FOR REMITTANCE
- It covers payments to non-residents and foreign companies (irrespective of their residential status).
- It covers all payers irrespective of their legal status (individuals, HUFs, etc.)
- No minimum threshold exemption. Tax is deductible even if the payment is negligible. (even Rs. 1 payment is covered)
- No prescribed rate for TDS- Tax is to be deducted at the rates in force.
- Even NR to NR payments made outside India are covered if chargeable to tax in India.
- Section 195 is a major tool for keeping an eye upon all the foreign transactions with regards to their chargeability to tax in India which decreases the chances of tax evasions by foreign remittances.
- It also facilitates easy collection of tax beyond geographical boundaries.
- Chartered accountants play an important role in implementation of the said section, as the certificate by a chartered accountant is mandatory for the remittance to be processed.