India: Withholding Tax On Payments To Non Residents

Understanding provisions relating to withholding tax on payment to non residents is vital for businesses and individuals engaged in cross-border transactions. Adhering to TDS provisions not only ensures compliance with tax regulations but also contributes to building a transparent and trustworthy global financial system. As businesses continue to operate in an increasingly interconnected world, staying informed about TDS requirements for non-resident payments is essential for sustainable and responsible financial management.

Section 195 of the Income-tax Act 1961 outlines provisions for tax deductions when making payments, excluding salary, to a non-resident individual (not a company) or a foreign company. As per section 2(23A) of The Income Tax Act 1961, foreign company means which is not a domestic company.

Definition of Non Resident

Section 2(30) of the Income Tax Act, 1961, defines a non-resident as an individual who does not qualify as a “resident.”As per Section 2(42) resident means a person who is resident in India within the meaning of Section 6.

As per Section 6 of Income tax Act 1961, an individual is said to be a resident in the tax year if he/she is:

1. physically present in India for a period of 182 days or more in the tax year (182-day rule), or
2. physically present in India for a period of 60 days or more during the relevant tax year and 365 days or more in aggregate in four preceding tax years (60-day rule).

The Finance Act, 2020, effective from the Assessment Year 2021-22, had modified the aforementioned provision. It stipulates that the period of 60 days mentioned in second condition will be substituted with 120 days if an Indian citizen or a person of Indian origin has a total income, excluding income from foreign sources, of an amount exceeding Rs. 15 lakhs in the previous year. Income from foreign sources refers to income accruing or arising outside India (excluding income derived from a business controlled in or a profession set up in India).

However in the case of an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources is less than 15 lakhs , 60 days as mentioned in second condition above will get substituted with 182 days.

Section 195 – Applicability and Provision

A bare reading of Section 195 from the Income tax Act 1961

Section 195(1)

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 :

Section 195(2)

Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application [in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.

Analysis of Provisions of Section 195

1. Meaning of Person :- Person responsible for deducting withholding tax u/s 195 can be :-

• Individual
• Hindu Undivided Family (HUF)
• Firm or LLP
• Company
• Association of Person
• Body of Individuals

2. Nature of Payment :-

1. Any interest excluding interest referred to in Section 194LB (Income by way of interest from Infrastructure Debt Fund ) 194LC (Interest income from Indian Company or Business  Trust ) 194LD ( Income by way of interest on certain bonds and Government securities)
   
   
2. Any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries)

3. When To Deduct TDS u/s 195

Tds would be deducted at the time of credit of such income to the account of payee or at the time of payment whichever is earlier.

4. Sum Chargeable under the provisions of Act

Section 195 is applicable only if that income is chargeable to tax in India. The nature of payments can be payment on account services rendered by non- resident or sale of goods. It can be in the nature of interest, royalty, technical services or any other income chargeable to tax in India.

Withholding Tax Rate u/s 195

If the payment to non- resident or to a foreign company is chargeable to Income tax in India, then withholding tax has to be deducted in accordance with rates in force.

According to Section 2(37A)(iii) , Rates In force means-:

• Finance Act of the relevant previous year
• As per the rates prescribed in Double taxation Avoiadance Agreement (DTAA)

So tax would be deducted in accordance with tax rates as per the Finance Act of the relevant year or as per the rate of DTAA whichever is more beneficial to the assessee. It is to important to mention that surcharge and Education cess are not required to be added in case of rates mentioned in DTAA.

TDS rates u/s 195 on various categories of income are prescribed below :-

Section 206AA of the Income Tax Act 1961 requires every taxpayer whether resident or non resident who receives taxable income to furnish their PAN to the payer of such income. If they do not submit their PAN no , they were subject to a higher rate of TDS . The non-residents were having difficulty as they didn't have PAN.Therefore Finance Act 2016 has relaxed the applicability of section 206AA in case of payment made to non-residents. Section 206AA will not apply to non-residents furnishing the following details to the payer :

1. The payee shall furnish all the key details like name, contact numbers and email ID.
2. They have to provide the address of the country in which they reside.
3. The payee has to furnish Tax Residency Certificate of his native country if the country provides for the issuance of the Tax Residency Certificate.
4. Tax Identification Number either in the country of residence or India. If it is not available, then a unique number needs to be provided for identification in the country of residence.

Consequences in the event of Non-Compliance with Section 195

If the TDS is either not deducted or not deducted in compliance with Section 195 of the Income Tax Act, 1961, the individual responsible for the payment will be obligated to remit the applicable tax, along with any interest and penalties imposed by the Income Tax Department. The consequences of not adhering to the provisions of Section 195 of the Income tax Act 1961 are outlined as follows

• Disallowance of Expenses :- If TDS u/s 195 is not deducted , it will lead to disallowance of expense u/s Section 40(a)(i)of the Income tax Act.

• Payment of Interest u/s 201 :- In case TDS u/s 195 is not deposited by the specified due date then as per the provisions of Section 201, interest at a rate of 1.5% per month or any part thereof will be imposed from the date of deduction to the date of deposit.

• Penalty u/s 221(1) :– Further penalty u/s 221(1) shall be imposed of such an amount as the Assessing Officer may impose. Nevertheless, the penalty is limited and cannot exceed the outstanding tax amount.

Conclusion

In conclusion, TDS on payments to non-residents is a crucial aspect of tax compliance, ensuring that the Indian tax authorities collect their due share from income earned by non-residents within the country. Payers must be diligent in understanding the provisions of Section 195 and fulfill their obligations to deduct taxes at source. Likewise, non-residents should be aware of the documentation requirements and seek professional advice to navigate the complexities of cross-border transactions. A comprehensive understanding of these regulations is essential for fostering transparency and adherence to legal norms in the realm of international financial transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.