Under the Income Tax Act, there are certain transactions have been specified under which TDS shall be deducted at the time of credit or payment as per the requirement of section. These sections includes 194A, 194B, 194C, 194J, 194I etc. In these sections, there’s a section U/s 195 which when payment is being made to any Non-Resident. In this article, we shall discuss the TDS on the payment made to Non-Resident.
The objective to charge the TDS on the payment to non-resident is to control the transaction. Since once the payment has been credited to the non-resident then it would be very hard for the government to collect the tax amount from such non-resident due to geographical boundaries. Hence, the burden to collect and deposit the tax has been transferred to the resident buyer.
This article shall be discussed in Frequently Asked Questions (FAQ) mode on TDS on Non-resident payments under section 195 of the Income-tax act.
Meaning of Non-resident?
Section 6 of the income tax act, 1961 has specified the criteria to decide the residential status of the assessee. Although, if the assessee stays more than 182 days in India in the relevant previous year, then he shall be resident otherwise he shall be called Non-Resident.
Who shall be responsible to deduct TDS under section.195?
As per section 195, irrespective of their status, all the taxpayers are covered like Individual, HUF, and Firm & Body Corporate, etc. So all the persons, who are payers, are responsible to deduct TDS under this section.
Who is the payee under section 195?
Under this section, all the payees are covered whether Individual or Corporate or any other status. So making payment to any nonresident, other than any company, covered under payee only if they fall under the definition of non-resident status as per section 6 of the Income-tax Act, 1961.
what kind of transactions are covered under sec.195?
Ans: Under this section, any interest amount (other than interest as per section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”).
So the following payment not required TDS deduction under this section
- Interest under sections 195LB/LC/LD
- Payment of Salary (because already covered u/s 192)
- Payment of Dividend u/s 115-O
i.e. except the above-specified payments, all other payments are covered under this section. However, if payment made against any import then it would not be covered under the purview of TDS.
If the above-specified payments are not covered under section 195 then in which section the TDS would be deducted for these payments?
As we discussed above, Section.195 totally excludes Salary and dividend payment. Hence if any salary payment is made to any NR then TDS shall be deducted u/s.192 not under section.195. Also, Dividend is not taxable in the hands of recipient i.e. NR because dividend distribution tax (DDT) is required to be paid by the company from whom the dividend is to be received.
What is the time for deduction of TDS?
TDS is required to be deducted at the time of credit or payment whichever is earlier. Time of credit means the time when the property is being handed over to the buyer but the payment is yet to be made and accordingly the TDS will apply.
What is the threshold limit for deduction of TDS?
Under this section, no threshold limit has been prescribed, TDS would be deducted on the entire amount of consideration without any threshold limit.
At which rate TDS would be deducted under section.195?
There are different rates has been specified as per the nature of the transactions. These rates have been defined in chapter XVIIB. However if payee i.e. NR does not have a valid PAN, then TDS @ 20% or as per rate prescribed chapter XVIIB whichever is higher shall be applicable.
When we are calculating TDS rates, we should consider the provisions of the Double Taxation Avoidance Agreement (DTAA) of the relevant country if any. In case NR is fulfilling all the prescribed conditions of DTAA then rates as per DTAA shall be applicable. Normally, rates under DTAA are lower than normal TDS rates.
Which exchange rate shall be considered for TDS on non-resident?
The RBI exchange rate shall be taken on the day on which TDS is required to be deducted.
What is the Double Taxation Avoidance Agreement (DTAA)?
Ans: Double Taxation Avoidance Agreement (DTAA) is an agreement established between two countries with the objective to avoid taxation on the same income in 2 countries. Currently, India has multiple DTAAs with more than 80 countries.
How can an NR take the benefit of DTAA?
The NR is required to submit the following documents with the payer to avail the TDS rates as specified under DTAA
- Tax Residency Certificate (TRC)(the most important document)
- PAN card copy
- Passport copy & visa copy (if any)
If the NRI has regular transactions with the payer then these documents are required to submit on an annual basis.
What is Tax residency certificate and from where to get this?
It is the certificate which has duly verified and issued by the Government of the country in which NR claims to be a resident for the purpose of tax. This can be obtained from the Government or Tax authorities of that particular country of NR.
What kind of details should be covered in TRC?
A TRC should cover the following details
- Name of the assessee
- Status of the assessee (Individual, Firm, Company, Etc.)
- Country of origin
- Assessee Tax Identification or Unique Identification number of the relevant Country
- Residential status for the purpose of tax
- Validity Period of the certificate
Procedure for the deduction of TDS u/s.195?
Ans: The Resident Payer needs to obtain 15CB** form(except in exceptional payments) from a Chartered Accountant while making the payment to Non-resident as per section.195(6) & rule 37BB and needs to file the form 15CA* ( undertaking by NR) online at income tax website through their PAN login. Once form 15CA is prepared then Resident Payer needs to take a print out of the form and sign and submit it along with Form 15CB to their banker/AD to make the payment. On every remittance, The Resident Payer need to follow the above procedure to remit the payment.
* 15CA:- It is required only if the payment to NR is below 5,00,000, then only part A of 15CA is required to be issued.
**15CB:-It is required when the payment to NR exceeds 5,00,000, then the following documents required to be filed:-
- part B of Form 15CA
- Part C of Form 15CA and,
- Certificate from Chartered Accountant in form 15CB
What kinds of details are covered in the form 15CB certificate?
The following details need to be submitted to a CA for form 15 CB:
- Agreement and Invoices copy;
- Details of Payment
- Technical Advice
- In the case of Group Company transactions, Proof of rendering of services.
- E-mails, Remitting bank details, Rate of conversion of foreign currency and other general information.
Can an NR eligible for taking the Nil deduction certificate?
Yes, as per section 195 (3) & Rule 29B, an NR may make the application to the department if he fulfills the following conditions
- NR has filed all his ITR due, as on date of filing of the application.
- He should not be in assesse in default
- He should not be liable for the penalty u/s.271(1)(iii)
- If he is Carrying a business in India for continuously at least 5 years and the value of the fixed assets in India exceeds Rs.50 Lakhs.
For how many transactions, the nil deductions certificate is valid?
Nil deduction certificate issued under section 195 (3) shall remain valid up to the expiry of the certificate or it has canceled by the A. O whichever is earlier.
What would be the penalty of the person does not comply with section.195?
If the buyer does not comply with the requirements of this section then following will be the consequences:
- Such expenses shall be disallowed u/s 40a(i).
- If the TDS has been deducted but not paid within time 30 days from the end of the month in which TDS was deducted then interest @ 1.50% per month or part of the month shall be levied from the date of deduction to date of deposit (Sec.201 (1A))
Also, in the above case, the penalty shall be levied which is equivalent to the TDS amount Sec.221
- if TDS has short deducted or not deducted then interest shall be charged @ 1% per month or part of the months and Penalty equivalent to the difference between actual deductible and deducted amount Sec.271C shall be levied from the date in which it is required to be deducted to the date of actual deduction of TDS.