India: TDS On Payment To Non-Resident – How To Claim Treaty Benefits.

Last Updated: 13 November 2018
Article by Malay Damania

With globalisation and fast expanding businesses beyond Indian territory, Indian Companies avail various kinds of services from Companies and professionals outside India and incur expenses like Royalty, Fees for managerial, technical or consultancy services, interest etc. They are therefore required to make payments against such expenses to non-residents. It is extremely vital to check whether the payment they seek to make attracts Withholding Tax (TDS) and if it does, what is the correct rate of tax that is applicable to that specified payment. 

Generally, the scope of taxability of income as well as the rate of tax is defined under the Indian Income Tax Act and also under the Double Tax Avoidance Agreement (Treaty) that India has signed with that country. The assessee has a right to avail the beneficial provisions (for the scope as well as rate of tax) between the Treaty and the domestic Act.

In case the Indian Company opts to avail benefit under the treaty, following conditions will have to be fulfilled and important aspects needs to be complied with.

Tax Residency Certificate (TRC):

Section 90 (4) of the Income Tax Act has been made it mandatory for a non-resident who wishes to avail Treaty benefits to provide Tax Residency Certificate (TRC) to the Indian Company (the Tax deductor).

TRC is issued by the Tax / Government authority of the country in which the Non-Resident is the resident of and is a proof that the recipient is resident of that country and therefore eligible to get benefit of the treaty that both the countries have entered into. No other document in lieu of TRC shall be considered for availing any benefit under the Treaty. Therefore, it is abundantly made clear in the Indian Income Tax Act that TRC is mandatory document to get an access to the Treaty.

Rule 21AB of the Income-tax Rules prescribes that the TRC must contain the information specified in Form 10F. The information required to be furnished under Form 10F is:

  • Status of the assessee;
  • Nationality;
  • Tax Identification Number in the country of Residence or Unique number on the basis of which the person is identified in that country;
  • Period for which residential status is applicable;
  • Address of the assessee in country of residence.

If the TRC issued by the Government authority contains all the information as prescribed above (Form 10F), it will be accepted. If not, in addition to the TRC, the Non-resident will have to provide a self-certified Form 10F providing the details as stated above.

If the TRC is not produced by the non-resident, he would not be able to apply beneficial provisions of the Treaty, if any and the Indian Company will have to apply the provisions of domestic Income Tax Act on that payment and withhold the tax accordingly.

Sec 206AA of the Income-tax Act read with Rule 37BC:

The provisions of section 206AA of the Act provide that any person who is entitled to receive any amount on which tax is deductible at source, shall furnish his PAN to the deductor, failing which a higher withholding tax of 20% will be applicable. 

However, an exception is carved out when payment is made to a non-resident, in respect of –

  1. payment of interest on long-term bonds as referred to in section 194LC;
  2. Interest;
  3. Royalty;
  4. Fees for Technical Services and
  5. Payment on Transfer of any Capital Asset.

In respect of the above specified payments (b to e), the non-resident deductee shall be required to furnish following details and documents:

  • Name, e-mail id, contact number;
  • Address in the country of residence;
  • Tax Residency Certificate (TRC), if the law of country of residence provides for issuance of such certificate; and
  • Tax Identification Number in the country of residence or a unique identification number on the basis of which the deductee is identified in the country of residence.

As can be seen from above, if the Non-Resident recipient of income does not possess Indian PAN card, it is mandatory for them to obtain TRC from the Tax Authority in their home country failing which TDS will apply @ 20% as specified in Section 206AA.

As can be seen from above, it is extremely important to refer the above relevant provisions at the time of making payment to a non-resident to check whether the correct rate of tax is applied on the payment.

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.

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