Tax Deducted at Source (TDS) is the first way of collection of any taxes. Under Income tax also TDS is the very important tax collection method. TDS under income tax varies based on the nature of transaction and payment by different sections, such as section.194A, 194B, 194C, 194I etc. Out of different TDS sections, section 195 is the very important section which covers the TDS on Non resident payments. Under globalisation scenario the business boundaries are not restricted with one country; it spread over all over the world. Accordingly tax laws are also differing. In our country the TDS on Non resident under section 195 is the unique section to identify the tax rates and deductions on our business transaction with non resident day to day basis. In this article I would like to discuss about the Frequently Asked Questions (FAQ) on TDS on Non resident payments under section 195 of Income tax act.
Q.1 What is the meaning of Non resident?
Ans : To decide the residential status of person under income tax, we need to check the basic and additional conditions and other criteria prescribed under section.6 of the Income tax act, 1961. Only Non resident covered under this section, Resident but not ordinary resident ( RNOR) not covered this section.
Q.2 Who is the Payer under section.195?
Ans: Under section.195 all the payers are covered irrespective of their status like Individual, HUF, and Firm & Corporate etc. So all the payers are responsible to deduct TDS under this section if they are making payment to non resident as per prescribed conditions.
Q.3 Who is the payee under section 195?
Ans: Under this section all the payees are covered whether Individual or Corporate or any other status. So making payment to non resident, not being company or to a foreign company covered under payee if they meet the non resident status under section.6 of the Income tax act.
Q.4 Which payments & expenses are covered under sec.195?
Ans: As per this section 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”).
So following payment not required TDS deduction under this section
a. Interest referred under sections.195LB/LC/LD
b. Salary payment
c. Dividend payment u/s.115-O
Above payments are exclude under this section from TDS deduction and all other payments are covered under this section. But payment against import is not comes under purview of TDS.
Q.5 What about the Salary & Dividend payment to Non resident?
Ans: Section.195 specifically excludes Salary and dividend payment, Salary payment to non resident covered u/s.192 not under section.195. Dividend not taxable in the hands of recipient since the dividend distribution tax paid by the declaring company.
Q.6 When to deduct the TDS?
Ans: TDS has to be deducted at the time of credit or payment whichever is earlier. Crediting which means even crediting in suspense account or any other name called considered as deemed to be credited, accordingly the TDS will apply.
Q.7 What is the threshold limit for deduction of TDS?
Ans: Under this section, there is no threshold limit is prescribed, TDS need to be deducted the entire amount without any threshold limit.
Q.8. What is the TDS rate as per section.195?
Ans: Relevant rate in force as per chapter XVIIB. Incase payee not having valid PAN, then TDS rate as per rate prescribed chapter XVIIB or 20% whichever is higher will apply. While calculating TDS rates we need to consider the provisions under Double Taxation Avoidance Agreement (DTAA) for the relevant country if any. In case payee fulfilling all the conditions as prescribed in the DTAA then rates as per DTAA will apply. Generally rates under DTAA will be lower than normal TDS rates.
Q.9 What will be the exchange rate for TDS on non resident?
Ans: Exchange rate of Reserve Bank of India ( RBI) on the day which TDS required to be deducted has to be considered
Q. 10 What is DTAA?
Ans: Double Taxation Avoidance Agreement (DTAA) is the agreement between two countries with an objective to avoid taxation on same income in both countries. Presently India has the comprehensive DTAAs with more than 80 countries.
Q.11 What is the conditions & procedure to avail DTAA benefit by NR?
Ans: The Non Resident Deductee has to submit the following documents with deductor to avail the TDS rates as per DTAA
a. Tax Residency Certificate (TRC)
b. PAN card copy
c. Self declaration
d. Passport copy & Visa copy (if any)
The above documents need to submit with deductor annual basis every year.
Q.12 What is Tax residency certificate and how & where to get that?
Ans: 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.
Q.13 What are the details should contains in TRC?
Ans: A TRC should contain the following details
a. Name of the assessee
b. Status of the assessee (Individual, Firm, Company Etc.)
e. Assessee Tax Identification or Unique Identification number of the relevant Country
f. Residential status for the purpose of tax
g. Validity Period of the certificate
h. Address of the applicant
Q. 14 What is the procedure to deduct the TDS u/s.195?
Ans: Remitter as per section.195(6) & rule 37BB need to obtain the form 15CB from a Chartered Accountant while remitting the payment to non resident and need to file the form 15CA ( undertaking by remitter) in online in the income tax website through their PAN login. After online preparation of form 15CA need to take print out and sign and submit along with form 15CB to their banker/AD to remit the payment. For every remittance, remitter need to above procedure to remit the payment.
Q.15 What details are required to obtain form 15CB certificate from a CA?
Ans: The following details need to be produced with CA for getting form 15 CB
Ø Agreement and Invoices;
Ø Payment details
Ø Technical Advice – prove bonafides
Ø Proof of services being rendered in case of Group Company transactions
Ø E-mails etc regarding pricing in case of Group Company transactions
Ø Remitting bank details
Ø Rate of conversion of foreign currency
Q.16 Whether Non resident eligible for getting Nil deduction certificate?
Ans: Yes. As per section.195 (3) & Rule 29B, a non resident can make the application to income tax department if he fulfils the following conditions
a. Assessee has been regularly assessed to tax and has filed all returns of income due as on date of filling of application
b. Not in default in respect of any tax, interest, penalty or any other sum
c. Not subject to penalty u/s.271(1)(iii)
d. Carrying on business in India continuously for at least 5 years and the value of the fixed assets in India exceeds Rs.50 Lakhs
Q.17 What is the validity of the certificate issued for Nil deduction?
Ans: Nil deduction certificate issued under section.195 (3) shall remain in force till the expiary of the certificate or cancel by the A. O whichever is earlier.
Q.18 Whether reimbursement of actual expenses covered u/s.195?
Ans: Since there is no income element in the reimbursement of expenses actually incurred by a non resident or foreign company not covered u/s.195. However the nature of transactions and payments depends upon the situation because different contradictory citations are available to justify for both the applicability and non applicability.
Q.19 What is the status of TDS deducted if after deduction the contract or work is cancelled?
Ans: There is cases that after making advance payment to Non resident or making partial payment to non resident the contract or work is cancelled by both parties. Such as case if any TDS deduction made while making payments, the same can be claimed from the department CIRCULAR NO. 7/2007 DATED 23-10-2007
Q.20 What will be the consequences of non complying of section.195?
Ans: following will be the consequences for non compliance of section 195
a. Disallowance of the particular expenses u/s.40a(i) if the TDS not at all deducted
b. If the TDS is deducted but not paid within time lime then interest @ 1.50 per month or part of the month from the date of deduction to date of deposit (Sec.201 (1A)
c. If the TDS deducted and not paid – Penalty equivalent to the TDS amount Sec.221
d. TDS deducted short – Penalty equivalent to difference between actual deductible and deducted amount Sec.271C .