Recently we had discussed about the TDS rate chart under the Income tax Act which was release by Income tax department.
However it was majorly covering TDS on payment made to resident, whereas TDS on payment to non-residents is majorly covered under section 195 of the Income tax act. With increase in technology and people making more and more international transaction understanding this provision is becoming more and more important.
Sections other than section 195 where TDS on non resident is covered are as under:
Section 192: Salary income to non-resident taxable in India
Section 194E: Payments to non-resident sportsmen or sports associations.
Section 194LBB: Income in respect of units of investment fund.
Section 194LBA: Certain income from units of a business trust.
Section 194LB: Income by way of interest from infrastructure debt fund.
Section 194LBC: Income in respect of investment in securitization trust.
Section 194LC: Income by way of interest from Indian company.
Now, let’s have a look at opening words of section 195 of the Income tax act which deals with TDS on majority of the transaction with non-residents:
“Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in 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”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.“
Important points to note:
If we have a look at the provision it speaks about any person responsible for paying to a non-resident. Hence, even if a non-resident is making a payment to non-resident TDS needs to be deducted by that non-resident if the payment is chargeable to tax in India.
This section applies to any person and without any threshold and not like many other TDS provisions which are applicable only on business transactions and have a threshold.
Hence, even a person making a payment to non-resident which is chargeable to tax in India as per provisions of Income tax Act, will have to deduct TDS on such transaction u/s 195 even if the payment is being made for personal expenses.
In the section it has been mentioned that tax needs to be deducted at “rates in force”. So many people wonder what is “rates in force”? So rates in force as defined in section 2(37A) are as under:
“(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means—
(iii) for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be”
Hence, as far as Income tax act is concerned rates in force for section 195 shall be rates defined under the Finance Act, which is announced every year. Thus, per Finance Act, 2021 TDS rate chart i.e. rates defined for section 195 are as under:
|Nature of payment
|Rate of tax
|a) Income in respect of investment made by a Non-resident Indian Citizen
|b) Income by way of long-term capital gains referred to in Section 115E in case of a Non-resident Indian Citizen
|c) Income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-Section (1) of Section 112
|d) Income by way of long-term capital gains as referred to in Section 112A
|e) Income by way of short-term capital gains referred to in Section 111A
|f) Any other income by way of long-term capital gains [not being long-term capital gains referred to in clauses 10(33), 10(36) and 112A
|g) Income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in Section 194LB or Section 194LC)
|h) Income by way of royalty payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern where such royalty is in consideration for the transfer of all or any rights (including the granting of a licence) in respect of copyright in any book on a subject referred to in the first proviso to sub-section (1A) of Section 115A of the Income-tax Act, to the Indian concern, or in respect of any computer software referred to in the second proviso to sub-section (1A) of Section 115A of the Income-tax Act, to a person resident in India
|i) Income by way of royalty [not being royalty of the nature referred to point h) above] payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy
|j) Income by way of fees for technical services payable by Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy
|k) Income by way of dividend
|l) Income by way of winnings from lotteries, crossword puzzles, card games and other games of
any sort or income by way of winnings from horse races
|m) Any other income earned by person other than company
|n) Any other income by company which is not a domestic company
Do remember that “cess” of 4% needs to be added to above rates and surcharge if applicable.
Also, these are the rates defined under Income tax act, if the recipient of such payment is resident of a country with which India has a treaty i.e. DTAA and conditions of section 90 and 91 are fulfilled then TDS can be deducted at rates mentioned under DTAA if same are more beneficial.
Also, remember that in all cases Form 15CA needs to be submitted while making any payment to non-resident and in some cases one would even need certificate in Form 15CB from Chartered Accountant. Only when the transaction is transaction covered under sub rule 3 of rule 37BB is when this Forms are not required. We would discuss same in detail in future post.
TDS statement for TDS deducted on payment made to non-resident needs to be submitted in Form 27Q.
Consequences of non-deduction or non-payment of TDS:
Disallowance of expense u/s 40(a)(i): In case the expense is done for business purpose then 100% of such expense shall be disallowed as compared to 30% in case of resident. Hence, it is very important to deduct correct TDS while making payment to non-resident.
Interest u/s 201: Assessee could be liable for interest u/s 201 for non-deduction or non-payment of TDS.
Penalty u/s 271C: Assessee can be liable for penalty of an amount equal to the amount of TDS which has not been deducted or which has not been paid to the government.
Prosecution u/s 276B: Assessee shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.
Thus, this is a small discussion on TDS for payment made to non-resident.
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Guidance on above article by:
CA Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with Jain Shrimal & Co. in Jaipur having experience in dealing Assessments, Tax Audit, Tax planning for NRI, Business planning and consultation.