Section 195 of Income Tax Act, applicability of TDS provisions on payments made to Non-Residents

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As per the Income Tax Act, 1961, any receipts generated through business transactions with NRIs come under the purview Income Tax Act and are subject to the TDS rate under Section 195. To know this provision better, we need to gather more details, so let us begi

 

Table of contents-

What is Section 195?

Section 195 of the Income Tax Act, 1961 talks about TDS deductions on payments or income of non-resident Indians (NRIs). 

This section specifies provisions that help to bypass double taxation and provide more focus on tax deductions and guiding rates applicable to business transactions concerning NRIs. TDS on non-residents is deducted earlier while crediting the concerned party or on the actual payment date.

Who is responsible to deduct tax u/s 195?

Any person responsible for paying to a non-resident, other than a company, or a foreign company, is liable to deduct income tax at the rates in force.

Here, let’s take a look on which entities are responsible for paying or remitting payments under Section 195 –

  • Individuals
  • HUFs
  • Non-resident Indians
  • Partnership firms
  • Individuals with exempted income in India
  • Foreign companies

Further, non-resident Indians with Income chargeable under Section 195 are deemed as the payee. 

You must also note that the rate of TDS under Section 195 is decided based on the nature of income or payment made.

Nature of Payment

  • Payment of any interest (not being interest referred to in section 194LB, 194LC, and 194LD)
  • Any other sum chargeable under the provision of this Act (except income chargeable under the head salaries)

When to Deduct TDS under Section 195?

The TDS is needed to be deducted at the time of credit of such amount to the account of the payee or at the time of payment, whichever is earlier.

Payment can be in cash or by the issue of a cheque or draft or by any other method. If interest is due by the Government or a public sector bank or a public financial institution, then tax shall be deducted only at the time of payment by cash, account payee cheque, or any other mode.

 Section 195(1) which exempted TDS on dividends has now been deleted. [Finance Act 2020], which means Dividends are now taxable for Non-residents as well.

On what amount the tax is required to be deducted? (Threshold limit)

There is no threshold limit given. However, tax shall be deducted on the sum chargeable to tax. Consequently, if there is no such sum chargeable to tax in India, then there is no requirement to deduct tax.

TDS to be deducted on any sum that is chargeable to tax under the provisions of Income Tax Act, 1961 other than income chargeable under the head Salaries. (E.g. Payments such as interest, royalty, fees for technical services are subject to tax deduction u/s. 195 of the Act)

When is Income said to be deemed to Accrue or Arise in India?

As per the provisions, the total income of a non-resident includes all the income that accrues or arises or is deemed to accrue or arise in India to the non-resident.

Now to verify whether the income of the non-resident is deemed to accrue or arise in India we are required to refer to Section 9.

 If the income is deemed to accrue or arise in India, then the payer is responsible to withhold the taxes in India.

The following Income shall be deemed to accrue or arise in India:

  •  Section9(1)(ii)– Income which is earned in India under the head “Salaries”, i.e. when the services are rendered in India [Tax is deductible u/s. 192]
  • Section9(1)(iii)– Salary payable by the Central Govt. to a citizen of India for services performed outside India [Tax deductible u/s. 192]
  •  Section9(1)(iv)– Dividend paid by an Indian company outside India
  •  Section 9(1)(v) Interest Income by way of interest payable by a Resident shall be deemed to accrue or arise in India besides if the amount used for business or profession led by such person outside India or to earn any income from any source outside India.
  • Section 9(1)(vi) –Royalty Income by way of royalty payable by a Resident shall be deemed to accrue or arise in India except where the royalty is payable in respect of any right, property or information used or services used for a business or profession carried on by such person outside India or to make or earn any income from any source outside India.
  • Section 9(1)(vii) Fees for technical services- Income by way of fees for technical services payable by a Resident, other than where the fees are payable in respect of services used in a business or profession carried on by such person outside India or for making or earning income from any other source outside India.
  • SECTION 9(1)(viii) Any sum of money-Income arising outside India, being any sum of money referred to in Section 2(24)(xviia), paid on or after 5th July 2019 by a resident to a non-resident or foreign company shall be deemed to accrue or arise in India.

Now let us read what Section 2(24) (xviia) covers; any sum of money covered u/s. 56(2)(x) of the Act.

 However, a Gift of any sum of money from a relative shall not be responsible for withholding tax obligation u/s. 195.

  • Section 9(1)(i) Income other than Interest / Royalty FTS / Salaries /Dividend-
    All income accruing or arising, whether directly or indirectly, through or from
    • Business connection in India
    • Property in India
    • Asset or source of income in India
    • Transfer of a Capital asset situated in India

For the removal of doubts, it is hereby stated that for this section, the income of shall be deemed to accrue or arise in India under clause (v) [Interest] or clause (vi) [Royalty] or clause (vii) [Fees for technical services] of sub-section (1) and shall be included in the total income of the non-resident, whether or not:

  •  The non-resident has a residence or place of business or business connection in India; or
  • The non-resident has rendered services in India.

Withholding Tax Obligation

If the payment to a non-resident or a foreign company is covered under section 9 of the Act and liable to tax, then this section will be applicable, As per Section 195 (1) Tax is asked to be deducted at the time of payment or credit, whichever is earlier at the rates in force.

Further, TDS under section 195 is also required to be withheld at the time of making provision on an accrual basis the payee is identified and the amount is ascertainable.

Applicable Rates

  • Rate or Rates in force means-The rates of income tax specified in the Finance Act of the relevant previous year, or DTAA (Double Taxation Avoidance Agreement), the provisions of the Act, or the DTAA, whichever is more beneficial to the assessee shall be applied.
  • Surcharge and Education Cess are not needed to be added separately if the rates mentioned in DTAA are applied.

Rate of TDS under section 195 of Income Tax Act, 1961:

Particulars Rate of Tax
Income in respect of investment made by a Non resident Individual   20%
Income by the way of long term capital gains in Section 115E in case of an NRI   10%
Income by way of long-term Capital Gains   10%
STCG under section 111A   15%
Any other income by way of LTCG 20%
Interest payable on money borrowed in Foreign Currency   20%
Income by way of royalty payable by Government or an Indian concern   10%
Income by way of royalty, not being royalty of nature referred to be payable by Government or an Indian concern   10%
Income by way of fees for technical services payable by Government or an Indian concern   10%
Any other income   30%

The above rates shall be raised by education cess @4% and applicable surcharge to corporate / non-corporate assessee. 

It is to note that rates mentioned in DTAA are to be applied if they are more beneficial.

Payments to Foreign companies having PE in India. 

Any person who is liable for paying any sum being royalty or fees for technical services to a non-resident / foreign company carrying on business through a Permanent Establishment (PE) in India shall deduct tax u/s. 195 of the Act at the applicable tax rates.

Rates to be used while making payments to Foreign Companies having a PE in India:

  • Amount exceeds Rs.1 Crore: 40% + 4% Cess + 2% Surcharge (42.432%)
  • Amount exceeds Rs.10 Crores: 40% + 4% Cess + 5% Surcharge (43.68%)

Application of Lower or nil deduction by the payer.

Application to be made by the payer when the payer believes that the whole of such sum would not be income chargeable in the case of the recipient. The appropriate proportion on which tax is required to be deducted under section 195 shall be determined by the Assessing Officer.

Also, a payer can obtain a nil deduction certificate under section 195.

Application of Nil or Lower deduction by the payee u/s 195(3)

The recipient of income (Payee) can also apply for receiving payment without deduction of tax at source to the Assessing Officer.

The lower tax rate has to be fixed keeping in view the estimated total income, total income of the previous 3 years, taxes paid for the current year.

Tax is to be deducted by the payer at the rate specified in the Lower Deduction Certificate issued by the AO.

Basics of FORM 15CA & FORM 15CB

As per section 195 of the Income Tax Act, tax is required to be deducted for any sum which is taxable under the Income Tax Act. So when a person wants to make any payment or pay any money to a non-resident, the bank will need to check whether the tax was paid or not. In case if the tax is not paid it will be checked if it is certified by the Chartered accountant under Form 15CB or the Assessing Officer. 

Need of 15CA and 15CB

Earlier, the person making remittance to Non-Resident was required to furnish a certificate in a specified format by RBI. The basic idea was to collect the taxes at a stage when the remittance is made as it may not be possible to collect the tax from the Non-Resident at a later stage. Thus to keep a check on the transactions in an efficient manner, it was proposed to introduce e-filling of information in the certificates. 

Section 195 of the Income-tax Act, 1961 mandates the deduction of Income-tax from payments made to Non-Resident. The person making the payment to non – resident is required to furnish an undertaking in form 15CA) followed by a Chartered Accountants Certificate in Form 15CB.

Form 15CA is a Declaration of the person remitting such amount and is considered as a means for accumulating information of payments which are liable to tax in the hands of recipient who is not a resident of India. 

Financial Institutions are now more careful in seeking such Forms before remittance is made since now as per revised Rule 37BB a duty is indicated on them to furnish Form 15CA.

Note: Form 15CB is needed to be filled only when the payment exceeds Rs 5 Lakh in the said financial year under the income tax act 1961.

Conclusion

Section 195 of the Income Tax Act, 1961 puts down provisions for tax deductions for Non-Resident Indians (NRIs). This section concentrates on tax rates and deductions on daily business transactions with a non-resident and on any amount made through these business transactions is chargeable under Income Tax Act, 1961. 

This section further provides guidelines on how to avoid a revenue loss arising out of tax liability from a non-resident by the way of deducting the same amount from their payments at the source. The payer, i.e. the person remitting payments to an NRI, can be any individual, domestic and international companies, Hindu Undivided Family (HUF), a person with exempt income in India, and a person with or without an income chargeable to tax in India. 

It is to be noted that the provisions of section 195 specifically eliminate salary and dividend payments to a non-resident. The provisions for a tax deduction on salary are governed by section 192; this includes non-resident employees as well. Dividend income is taxable in the hands of the recipient w.e.f from FY 2020-21, any person, who is not a resident in India (NRI) will have a dividend income taxed at 20% plus applicable surcharge and 4% health and education cess on a gross basis. 

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CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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