Foreign Remittances &
Tax Withholding
1. There has been increase in cross border
transactions both for trade as well as investment. Due to this, the importance
of section 195 of the Income Tax Act, 1961 is increasing since it impacts every
commercial transaction dealing in any cross border transactions. The objective
is to ensure, that the tax liability on the income element, on the amount paid,
should be deducted at source itself so that the department is not put to the
hassles of recovering it from a non-resident whose connections with India may
be transient or whose assets in India may not be sufficient to meet the tax
liability. It is very pertinent to note that this section is wider in scope
than all the other TDS sections in so far as it covers all and there is also no
threshold exemption.
2. Procedure for remittance-
Step1 Check if
payment is covered under 195.
Step 2 Verify
the documents and agreements
Step 3 Make
classification of transaction on the basis of nature of income
Step 4 Check
taxability under Income Tax Act
Step 5 Check
taxability as per DTAA along with the availability of Tax
Residency
certificate.
Step 6 Check the rates of TDS applicable
Step 6 Check the rates of TDS applicable
3. Section 195
Sec 195(1) Liability on payer to deduct tax on payments made to
non-residents
Sec 195(2) Application by payer for lower / Nil withholding
Sec 195(3) Application by payee for Nil withholding
Sec 195(4) Validity of certificate of lower/ nil deduction
Sec 195(5) Empowers CBDT to
notify rules
Sec 195(6) Empowers CBDT the manner of furnishing information
Sec
195(7) CBDT to specify class of
persons or cases where application to AO is Compulsory
Sec 195(A) Income payable "net of tax"
4.
Scope & Chargeability [Section 195 (1)]
Deduction under this section is to be made on
earlier of credit or payment of Sum
chargeable to tax at the rates in force on payments made.
chargeable to tax at the rates in force on payments made.
Exception:-
Section
|
Description
|
Sec 192
|
Salary
|
Sec 194LB
|
Interest
payable by an Infrastructure Debt Fund referred u/s 10(47)
|
Sec 194LC
|
Interest on
approved foreign currency loans obtained by an Indian company
|
Sec194LD
|
Income by way
of interest on certain bonds and Government securities
|
Sec 115O
|
Dividend
referred in Dividend Distribution Tax
|
"Foreign Company"
means company which is not a domestic
company "domestic company' means an Indian company, or any other company
which, in respect of its income liable to tax under his Act, has made the
prescribed arrangements for the declaration and payment, within India, of the
dividends including dividends on preference shares) payable out of such
income).
As per Section 5,
Non-residents (including NRIs) are chargeable to tax only on income which is
received or deemed to be received in India or which accrues or arises or deemed
to accrue or arise to him in India.
However, scope of section 195
extended to all persons including non-residents irrespective of them having a
residence or place of business or business connection or any other presence in
India. There is obligation to withhold tax even without any territorial nexus.
Section 9 deems the following
income as accruing or arising in India:
(i)
Any
income accruing or arising, directly or indirectly from any business connection
in India or through any property in India or through any asset or source of income in India or through the
transfer of capital asset situated in
India.
(ii)
Income
under the head salary chargeable if earned
in India.
(iii)
Salary
paid by government to citizen of India for services rendered by him Outside
India.
(iv)
Dividend
Paid by Indian Company outside India.
(v)
Interest
payable by government or resident or Non-resident to NR in respect of debt
incurred money borrowed and used for the purpose of business & profession carried on by such person in India.
(vi)
Royalty
payable by government or resident or Non-Resident to NR in respect of services
utilized for the purpose of business or profession in India or for earning any income from any source in India.
(vii)
Fees
for technical services payable by government or resident or Non-Resident to NR
in respect of services utilized for the purpose of business or profession in India or for earning any income from
any source in India.
The sum paid to a
non-resident should be chargeable under the provisions of the Act, for
deduction of tax at source u/s 195. The words" Chargeable under the
provisions of the Act" used in the section applies on both interest as
well as any other sum. Hence, if income is not chargeable to tax under
provision of income tax act, then there is no requirement to deduct tax u/s 195.
5.
Payer's application for lower/ Nil WHT certificate [See 195
(2)]
Application to be made to tax officer by the payer to
determine portion of payment
chargeable to tax and thereof determined tax shall be deducted under sub-section (1)
only on proportion of sum which is so chargeable.
chargeable to tax and thereof determined tax shall be deducted under sub-section (1)
only on proportion of sum which is so chargeable.
6.
Payee’s application for lower/Nil WHT certificate [See
195 (3)]
6.1.
Payee
may make an application in the prescribed form to the AO for the grant of a
certificate authorizing him to receive such interest or other sum without
deduction
of tax under that sub-section, and where any such certificate is granted, then
payer
so long as the certificate is in force, may make payment of such interest or
other sum
without deducting tax thereon.
6.2.
Conditions
for grant of license prescribed in Rule 29B Form 15C & 15D
Person
|
Operating Mode
|
Eligible income for which application can be made
|
Foreign Banking Company
|
Carries Operations Through Branch
|
Interest Income (not on securities) or any other sum (not being
dividend)
|
Any other Person
|
Carries Business or profession through Branch
|
Any sum not being Interest or Dividend
|
o
Conditions
§
Person must be regularly assessed in India
§
Must have furnished returns of income for all A/Y
§
He is not in default or deemed to be in default under act
§
Has not been subject to penalty U/S 271(1)(iii)
§
For person other than banking additional conditions:-
·
Must be carrying business or profession for not less than 5 years in
India AND
·
Value of fixed Assets exceeds Rs.50lacs.
Application form for Banking -15C
Application form for other - 15D
7.
Validity and rules for grant of
certificate [See 195 (4)]
Certificate granted u/s 195(3) valid
till specified period or till cancellation by AO whichever is earlier .
Board may make rules specifying the
cases in which, and the circumstances under which, an application may be made
for the grant of a certificate under sub section (3) with the specified conditions.
9.
Furnishing information [See 195 (6)]
1. Requires the payer to furnish payment
related information
2. Rule 37BB introduced
3. Information to department in Form 15CA
4. CA Certificate to be obtained before
payment Form
5. Ref: Circular no. 4/2009 dated
29-06-2009 providing the manner for submitting processing the details of
payment.
6.
Information to be furnished electronically.
Moreover,
Section 195(6) has been amended in the Finance Act 2015 and which states that Form
15CA I CB needs to be
necessarily filed for all remittances, whether chargeable to tax in India or
not. All the assesses requested for submission of Form 15CA/CB for outward
cross border remittances including those against imports with effect from June
2015
10.
Power
of CBDT to specify class of persons or cases where application to AO u/s 195(2) Compulsory: [See 195 (7)]
Board empowered to notify class of
persons (payees) required to apply to tax officer
determination of WHT, irrespective of whether payment is taxable in India or
not.
11. TDS Rates:
Relevant
rate in force as per chapter XVII-B. In case payee not having valid PAN, then
rate prescribed chapter XVII-B (Finance Act) or 20% whichever is higher will
apply calculating TDS rates, we need to consider the provisions under DTAA for
the relevant country if any. In case payee fulfilling all the conditions as
prescribed in the DTAA rates as per DTAA will apply.
Applicability of Surcharge: Rates prescribed under the Act has to be increased by
Surcharge and Education Cess & SHEC at the prescribed rates. However, if the payment is as per DTAA rates, no requirement to increase by Surcharge or EC or SHEC.
Surcharge and Education Cess & SHEC at the prescribed rates. However, if the payment is as per DTAA rates, no requirement to increase by Surcharge or EC or SHEC.
12. Exchange
rate for TDS on non-resident:
For the purpose of TDS on any
income payable in foreign currency, the rate of exchange to be used shall be
telegraphic transfer buying rate of such currency as on the date on which tax
is required to be deducted at source.
Telegraphic buying rate means
the exchange rate adopted by State Bank of India for buying such currency.
13. Conditions
& procedure to avail DTAA benefit
by NR:
The Non Resident dedicatee has
to submit the following documents with deductor or to avail
the benefit of lower TDS rates as per DTAA:
1.
Tax
Residency Certificate (TRC)
2.
PAN
card copy
3.
Self
declaration relating to Permanent establishment
14.
TRC Concept:
Tax Residency certificate
(TRC) is the certificate duly verified and issued by the Tax
Department or 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 Non-Resident.
Department or 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 Non-Resident.
A TRC should contain the following details
1.
Name
of the assessee
2.
Status
of the assessee (Individual, Firm, Company Etc.)
3.
Nationality
4.
Country
5.
Assessee
Tax Identification or Unique Identification number of the relevant
Country
Country
6.
Residential
status for the purpose of tax
7.
Validity
Period of the certificate
8.
Address
of the applicant
If any detail is missing in TRC, the declaration
from the NR to be taken in Form 10F.
15. Form
15CA and Form 15CB
1.
Remitter to obtain certificate of a Chartered
Accountant in Form 15CB
2.
Some focus
area in issuing Form 15CB:
1.
Nature
of the income FTS, Royalty, Interest, etc.
2.
Whether
payee has a PE in India? If yes, attributable profit.
3.
Whether
TRC is sufficient evidence for claiming treaty benefit?
3.
Remitter
to access the income tax e-filling website and electronically upload the, remittance details in Form 15CA. After
filling, remitter is required to take a print of the filled undertaking (Form
15CA) with system generated acknowledgement number.
4.
The
duly signed paper Form 15CA (undertaking) and Form 15CB (certificate) is then submitted
in duplicate to the RBI/authorized dealer.
5.
A copy
of Form15CA & Form15CB is
forwarded by RBI/Authorized Dealer to the concerned
Assessing Officer
16. Consequences
of Non Compliance of TDS:
Where any person, who is required to deduct any sum in
accordance with Income Tax Ac but does not deduct, or does not pay or after
deducting fails to pay shall deemed to be ‘Assessee
in default’ and the assessee shall be liable for interest and penalty.
Section
|
Nature of Default
|
Consequence
|
40(a)
|
Withholding
tax not deducted or not deposited within
prescribed time |
Disallowance
of expenses in computation of taxable income of payer;
deduction in year of payment |
201(1)
|
Tax
not withheld deposited appropriately
|
Recovery
of tax not withheld deposited or short withheld deposited
|
Interest
u/s 201(1A) |
Tax not withheld/
deposited
appropriately |
Interest
@ 1% per month or part of
the month for non-deduction. Further, interest @ 1.5% per month is payable from the date of deduction till the date when tax is actually paid |
Penalty u/s 221
|
Tax withheld not paid
|
Penalty,
not exceeding the amount
of tax not paid can be levied by AO |
Penalty
u/s 271 C
|
Tax
not Withheld or short Withheld
|
Penalty,
not exceeding the amount
of tax not withheld can be withheld by Joint Commissioner. |
Penalty u/s 272A
|
Failure to file TDS return
|
Penalty
of INR100 per day of de-
fault subject to maximum of tax deductible |
Penalty u/s 271-1
|
Non-furnishing
of information or furnishing of incorrect information under section 195(6)
|
Penalty
of INR 1,00,000 per trans-
action |
Prosecution u/s 2768
|
Failure
to pay tax deducted
|
Minimum:
3 months
Maximum: 7 years |
17. Proforma for Form 15CB under Rule 37BB
FORM
NO. 15CB
(See
rule 37BB)
Certificate
of an accountant
We have examined the agreement Mr./Ms./M/s
………………. and Mr./Ms./M/s ……………….
requiring the above remittance as well as the
relevant documents and books of account required for ascertaining the nature of
remittance and for determining the rate of deduction of tax at source as per
provisions of Chapter XVII-B. We hereby certify the following:
A
|
Name and
address of the beneficiary of the remittance: …………………..
|
|||
B
|
1
|
Country to
which remittance is made
|
Country:
|
Currency:
INR
|
2
|
Amount of
payable
|
In foreign
currency USD
|
In Indian
Rs. 0/-
|
|
3
|
Name of the bank
|
Branch of the
Indian bank
|
||
4
|
BSR Code of the bank branch (7 digit)
|
Above
Branch
|
||
5.
|
Proposed date of remittance (DD/MM/YYYY)
|
|||
6.
|
Nature of remittance as per agreement/ document
|
|||
7.
|
In case the remittance is net of taxes, whether
tax payable has been grossed up?
|
|||
8.
|
Taxability under the provision of the Income Tax
Act (without considering DTAA)
|
|||
(i)
|
Is remittance
chargeable to tax in India?
|
|||
(ii)
|
If not, reason
thereof
|
|||
(iii)
|
If Yes,
|
|||
(a)
The relevant section of the Act under which the
remittance is covered
|
||||
(b)
The amount of income chargeable to tax
|
||||
(c)
The tax liability
|
||||
(d)
Basis of determining taxable income and tax
liability
|
||||
9
|
If income is chargeable to tax in India and any
relief is claimed under DTAA-
|
|||
(i)
|
Whether tax
residency certificate is obtained from the recipient of remittance
|
|||
(ii)
|
Please specify
relevant DTAA
|
|||
(iii)
|
Please specify
relevant article of DTAA
|
|||
(iv)
|
Taxable income
as per DTAA
|
|||
(v)
|
Tax liability
as per DTAA
|
|||
A
|
If the
remittance is for royalties, fee for technical services, interest, dividend,
etc, (not connected with PE) please indicate:-
|
|||
(a) Article of
DTAA
|
||||
(b) Rate of TDS
required to be deducted in terms of such clause of the applicable DTAA
|
||||
B.
|
In case the
remittance is on account of business income, please indicate:-
|
|||
(a) Whether
such income is liable to tax in
|
||||
(b) If so, the
basis of arriving at the rate of deduction of tax.
|
||||
(c) If not, please
furnish brief reason thereof specifying relevant article of DTAA
|
||||
C.
|
In case the
remittance is on account of capital gains, please indicate:
|
|||
(a) amount
of long term capital gain
|
||||
(b) amount of
short term capital gain
|
||||
(c) basis of arriving at taxable income
|
||||
D.
|
In case of
other remittance not covered by sub-items A, B, and C
|
|||
(a) please specify nature of remittance
|
||||
(b) whether taxable in India as per DTAA
|
||||
(c) If yes, rate of TDS required to be deducted
in the terms of such article of the applicable DTAA
|
||||
(d) If
not, please furnish brief reason thereof specifying relevant Article
of DTAA
|
||||
10.
|
Amount of TDS
|
In foreign currency
In INR
|
||
11.
|
Rate of TDS
|
As per Income Tax Act
As per DTAA
|
||
12.
|
Actual amount of remittance after TDS
|
In foreign currency USD
|
||
13.
|
Date of deduction of tax at source
|
NA
|
||
Certificate No.: ………………
Date : ……….. Name
Place: ………… Firm
Name
Chartered Accountants
(FRN–)
Address:
Membership No ………….
__________________________________________________________________________________
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