Income Tax

Section 195: TDS on Payment to Non-Resident Persons

Section 195 of the Income Tax Act, 1961, is basically concerned about the Tax Deducted at Source (TDS) for the non-resident people of India. This section basically highlights the tax rates and deductions related to all business transactions.

Tax Deducted at Source is the first way of collecting taxes. Section 195 of the Income Tax Act is a section that covers the TDS on Non-resident payments. This section identifies the tax rates and deductions on the business transactions with a non-resident on a day–to–day basis.

Under Section 195, the income is chargeable under Income Tax Act. Any sum is charged and the certificate for remittance is mandatory. Any sum chargeable to tax is the amount that is paid which bears the character of income and gross amount, the whole of which may or may not represent income or profits.

The Act lays out a provision to avoid a revenue loss as a result of tax liability in the hands of a foreign resident, by deducting the same amount from payments made to them at the source.

A payer is a person who is remitting the payment to a non-resident payee. The payer can be individuals, Hindu Undivided Family, firms, non-residents, foreign companies, persons having exempt income in India, and any juristic person irrespective of whether that person has income chargeable to tax in India or not. The payee is a non-resident whose residential status is as per Section 6 of the Act.

Who is responsible to deduct tax u/s 195?

Any person responsible for paying to a non-resident, not being a company, or to a foreign company, shall deduct income-tax thereon at the rates in force.

Nature of Payment

  1. Any interest (not being interest referred to in section 194LB, 194LC, and 194LD)
  2. Any other sum chargeable under the provision of this Act (not being income chargeable under the head “Salaries”)

When to Deduct TDS under Section 195?

At the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier.
For this purpose credit to Interest, payable account or Suspense account, or any other name shall be deemed to be a credit of such income to the account of the payee.

For this purpose, payment can be in cash or by the issue of a cheque or draft, or by any other mode.
If interest is payable by the Government or a public sector bank or a public financial institution, then tax deduction shall be made only at the time of payment thereof in cash or by cheque or draft, or any other mode.

Second Proviso to Section 195(1) exempting TDS on dividend referred to in Section 115-O has been deleted.[Finance Act 2020]

Threshold limit

No threshold limit. However, the tax shall be deducted from the sum chargeable to tax. Therefore, if no sum is chargeable to tax in India, then no tax is required to be deducted.

Other sums under Section 195

  • Applicability:

TDS to be deducted on any sum chargeable under the provisions of Income Tax Act, 1961 not being income chargeable under the head Salaries‘. (E.g. Payments such as interest, royalty, fees for technical services are liable for tax deduction u/s. 195 of the Act)

  • Who will be the Payer? 

Any person (both Resident and Non-resident)

  • Who will be the Payee?

Non-residents / Foreign Company

  • What is the Threshold limit?

NIL i.e. No Threshold limit.

No TDS u/s. 195 on payment of income chargeable under the head ‘Salaries‘ or payments covered u/s. 194LB or 194LC or 194LD. TDS to be deducted at the time of payment or credit, whichever is earlier.

Income Deemed to Accrue or Arise In India

As per the provisions of Section 5(2)(b) of the Act, the total income of a nonresident also includes all income that accrues or arises or is deemed to accrue or arise in India to the non-resident.
To check whether the income of the non-resident is deemed to accrue or arise in India–We have to refer to Section 9.

If the income is deemed to accrue or arise in India, then the payer is liable to withhold taxes in India.
The following shall be deemed to accrue or arise in India:

Section9(1)(ii)– Income which falls under the head “Salaries”, if it is earned in India, i.e. when the services are rendered in India [Tax deductible u/s. 192]

Section9(1)(iii)– Salary payable by the Central Govt. to a citizen of India for services rendered 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 except if the amount used for business or profession carried on by such person outside India or for the purposes of making or earning 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 utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning 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, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.

SECTION 9(1)(viii) –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 / foreign company shall be deemed to accrue or arise in India.

Also read: Communication between Recipient and Supplier Taxpayers

Section 2(24)(xviia) includes in Income-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 liable 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

EXPLANATION TO SECTION 9

For the removal of doubts, it is hereby declared that for the purposes of this section, the income of a non-resident 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 u/s. 195

If the payment to a non-resident or a foreign company is covered u/s. 9 of the Act and chargeable to tax, the provisions of Section195 of the Act shall come into play.
As per Section 195 (1)–Tax is required to be deducted at the time of payment or credit, whichever is earlier at the rates in force.

Also read: How to Rectify an Order/Intimation?

Further, TDS u/s. 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.

RATES IN FORCE –Section 2(37A)(iii)

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)

Section 90(2)-The provisions of the Act or the DTAA, whichever is more beneficial to the assessee shall be applied.

Surcharge and Education Cess – Not required to be added separately if the rates mentioned in DTAA are applied.
RATES IN FORCE –Finance Act, 2020

Some Important Rates mentioned in the Finance Act, 2020 for the purpose of withholding tax u/s.195 are as under:

  • Dividend–20%
  • Royalty–10%
  • Fees for technical services–10%
  • Interest (other than 194LB / 194LC / 194LD) –20%

The above rates shall be increased by education cess @4% and applicable surcharge to corporate / non-corporate assessee. Rates mentioned in DTAA should be applied if they are more beneficial.

Read this: Input Tax Credit – How to avail 100% ITC in 2021

PERMANENT ESTABLISHMENT

Any person who is responsible 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 rate of tax at applicable rates.

Thus, for payments to Foreign Companies having a PE in India:

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

LOWER / NIL DEDUCTION CERTIFICATE–

Application By Payer u/s. 195(2) – Application to be made by the Payer.

When to make the application?

When the payer considers that the whole of such sum would not be income chargeable in the case of the recipient The Assessing Officer shall determine the appropriate proportion of such sum, on which tax is required to be deducted u/s. 195 of the Act. Nil Deduction Certificate can also be obtained u/s. 195(2) by the payer.

NIL DEDUCTION CERTIFICATE

Application By Payee u/s. 195(3)

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

For. E.g. In the case of transfer of capital assets, if the payee wants to claim exemption u/s. 54 or 54F, he can apply to the Assessing Officer for receiving payment without deduction at source.

NIL / LOWER DEDUCTION CERTIFICATE u/s. 197 -FORM 13

The recipient of income can apply to the Assessing Officer for Lower Deduction Certificate u/s. 197 of the Act.
Application to be made in prescribed Form No.13 electronically.

Also read: Corporate Compliance Calendar for March 2021: GST, Income Tax, Company Law, SEBI, and RBI

Lower Rate to be determined keeping in view the estimated total income, total income of previous 3 years, taxes paid for the current year. Tax to be deducted by the payer at the rate mentioned in the Lower Deduction Certificate issued by the AO.

FORM 15CA & FORM 15CB

Introduction:

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 desires to make any payment or remit any money to a non-resident, the bank will require to check whether the tax was paid or not.

If not paid; it will be checked if it is certified by the Chartered accountant or the Assessing Officer. But there are at least 33 types of foreign remittance where the assessee does not require any submission of Form 15CA or Form 15CB.

Need of 15CA and 15CB:

Earlier, the person making remittance to Non-Resident was required to furnish a certificate in specified format circulated by RBI. The basic purpose 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 monitor and track 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 remittance to non – resident needs to furnish an undertaking (in form 15CA) accompanied by a Chartered Accountants Certificate in Form 15CB.

1. What is Form 15CA?
Form 15CA is a Declaration of Remitter and is considered as a tool for collecting information in lieu of payments that are chargeable for tax in the hands of the recipient non-resident of India.

Read this: Income Tax Slab for FY 2020-21 (AY 2021-22)

This is starting of an effective Information Processing System which may be utilized by the Income-tax Department to freely track the foreign remittances and their source to determine tax liability. 

Financial Institutions are now more vigilant in seeking such Forms before remittance is effected since now as per revised Rule 37BB a duty is implied on them to furnish Form 15CA received from remitter to an income-tax authority for the uses of any proceedings under the Income-tax Act.

2. Parts of Form 15CA
Part A – Section A of Form 15CA is filled in by the remitter when the payment or the total sum of the payment extended by the remitter to the NRI recipient during a particular Financial Year is Rs. 5 Lakhs or less.

Part B – Section B of Form 15CA is in the role when such payments are more than Rs. 5 Lakhs. Information is entered by the filer in Section B after acquiring a certificate from the Assessing Officer (valid under section 197) or the order from the Assessing Officer (valid under sub-section (2) or sub-section (3) of section 195).

Part C – If such payments made during a particular FY exceed Rs. 5 Lakhs, the related information has to be entered in Section C of Form 15CA after acquiring the Tax Determination Certificate or Form 15CB from authorized CA (valid under sub-section (2) of section 288).

Part D – Payments made by the remitter during a particular FY which is not referred to in sub-section 37BB or in other words is not taxable under law, the information related to such payments is to be entered in Section D of Form 15CA.

Note: Form 15CB is required to be filled only when the remittance exceeds Rs 5 Lakh in the said fiscal under the income tax act 1961.

Read also: CBDT to decide relaxation in ‘residency rule’ if forced stay in India due to COVID-19 resulted in double taxation

Analysis:-
A person responsible for making a payment to a non-resident or to a foreign company has to provide the following details –
(i) When payment made is below Rs 5 lakh
For such payments information is required in Part A of Form 15CA
(ii) When payment made exceeds Rs 5 lakh

  • Part B of Form 15CA has to be provided
  • Certificate in Form 15CB from an authorized CA.
  • Part C of Form 15CA

(iii) When the payment made is not chargeable to tax under IT Act

  • Part D of Form 15CA
  • In the following cases, no submission of information is required

The remittance is made by an individual and it does not require prior approval of Reserve Bank of India [as per the provisions of section 5 of the Foreign Exchange Management Act, 1999 (42 of 1999) read with Schedule III to the Foreign Exchange (Current Account Transaction) Rules, 2000]

There are at least 33 types of foreign remittances where you do not require any submission of Form 15CA or Form 15CB under rule 37BB: 

Sl. No. Purpose code as per RBI Nature of payment
(1) (2) (3)
1 S0001 Indian investment abroad – in equity capital (shares)
2 S0002 Indian investment abroad – in debt securities
3 S0003 Indian investment abroad – in branches and wholly-owned subsidiaries
4 S0004 Indian investment abroad – in subsidiaries and associates
5 S0005 Indian investment abroad – in real estate
6 S0011 Loans extended to Non-Residents
7 S0101 Advance payment against imports
8 S0102 Payment towards imports – settlement of an invoice
9 S0103 Imports by diplomatic missions
10 S0104 Intermediary trade
11 S0190 Imports below Rs.5,00,000 – (For use by ECD offices)
12 SO202 Payment for operating expenses of Indian shipping companies operating abroad
13 SO208 Operating expenses of Indian Airlines companies operating abroad
14 S0212 Booking of passages abroad – Airlines companies
15 S0301 Remittance towards business travel
16 S0302 Travel under basic travel quota (BTQ)
17 S0303 Travel for pilgrimage
18 S0304 Travel for medical treatment
19 S0305 Travel for education (including fees, hostel expenses, etc.)
20 S0401 Postal services
21 S0501 Construction of projects abroad by Indian companies including import of goods at the project site
22 S0602 Freight insurance – relating to import and export of goods
23 S1011 Payments for maintenance of offices abroad
24 S1201 Maintenance of Indian embassies abroad
25 S1202 Remittances by foreign embassies in India
26 S1301 Remittance by non-residents towards family maintenance and savings
27 S1302 Remittance towards personal gifts and donations
28 S1303 Remittance towards donations to religious and charitable institutions abroad
29 S1304 Remittance towards grants and donations to other Governments and charitable institutions established by the Governments
30 S1305 Contributions or donations by the Government to international institutions
31 S1306 Remittance towards payment or refund of taxes
32 S1501 Refunds or rebates or reduction in invoice value on account of exports
33 S1503 Payments by residents for international bidding.

What is Form 15CB?

Form 15CB liability can be ascertained and certified by obtaining the Certificate from a Chartered Accountant in Form no. 15CB. This certificate has been prescribed under Section 195(6) of the Income-tax Act and is an alternate channel of obtaining Tax clearance apart from the Certificate from the Assessing Officer.

General Faqs related to 15CA and 15CB: 

  • What are the consequences involved in Nonfiling of Form 15CA 15CB?

    If an Assessee who is required to file Form 15CA 15CB fails to furnish the same before making remittance to a non-resident, then he has shall be liable to penalty provisions under section 271I of the Income-tax Act, 1961. Such Penal provision shall be attracted even if the person furnished inaccurate information. The amount of penalty which the Assessing officer may ask the Assessee to pay for Non-compliance is Rs.1lakhs.
  • Can Filed Form 15CA form 15CB be revised or canceled?

    Yes, Form 15CA can be withdrawn within 7 days from the date of Submission. The link to withdraw the submitted form will be available on the website of the Assessee concerned.
 

Pradeep Sharma

I am a CS Student. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career, and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life & thrive to be better each day.

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