Understanding on Withholding Tax under section 195 of Income Tax Act, 1961

The understanding on withholding tax under section 195 of the Income Tax Act, 1961 (“Act”) has become essential for all the professionals and CFOs as there has been a astounding proliferation in cross border transactions. Almost all organization having any type of cross boarder transactions are required to comply with section 195 of the Act. Since the Income Tax Department do not have adequate control over non residents, the department want to ensure the deduction of tax on the income element of any amount paid to non-resident so that department do not have to chaise the non-resident for recovery of taxes. As compare to other provision of TDS, section 195 has wider scope as all payers are covered and there is also no threshold exemption available in the section. Therefore, any person making any payment must ensure the compliance stated in the said section and related rules.

Requirements:

Section 195 does not only require payer to withhold the tax (WHT) but also to obtain certificate from the Chartered Accountants in the prescribed format i.e. Form 15CB and to file the declaration online regarding the payment in Form 15CA. The section also provides the remedy in case payer/payee think no/lower tax need to be withheld. Both the payer as well payee may file an application with the authority for relaxation in withholding of taxes. The following tables give summary of provisions of section 195:

Recourses available to avoid huge WHT

Sum Chargeable to Tax

 

Section 5 propose to tax following income in the hand of non-resident:

I. Income received or is deemed to be received in India in such year by or on behalf of such person; or

II. Income accrues or arises or is deemed to accrue or arise to him in India during such year.

Section 9 defines the various incomes of a non-resident, which are to be considered as deemed to accrue or arise in India. The summary of the section is as follows:

Clause of Section 9(1)

Nature of transactions covered

(i)

Income accruing or arising from business connection/property asset/source of income in India

(ii)

Salaries, if earned in India

(iii)

Salaries payable by the Government to a citizen of India for service outside India

(iv)

Dividend paid by Indian Company outside India

(v)

Interest

(vi)

Royalty

(vii)

Fee for technical services

Having established that the remittance is subject to WHT, next question come up as to what rate are to be used for WHT. Section 195 states that WHT is to be done on “rates in force”. What are rates in force is defined u/s 2(37A) as follows:

“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 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;

Further, CBDT has clarified vide circular no. 728 dated 30-10-1995 that in view of the provisions of sub-section (2) of section 90 of the Act, in case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.

However, in case the beneficiary does not have PAN, higher of applicable rates as derived above or 20% will be applicable as per section 206AA. However, such special rate i.e. 20% shall not be increased by surcharge or cess. Similarly in case of rates as per DTAA, surcharge and cess are not to be added.

Conditions to be satisfied to avail benefit under DTAA:

The Non Resident beneficiary, to avail benefit under DTAA, has to submit the following documents with the payer:

ü Tax Residency Certificate (TRC)

ü PAN card copy

ü Self declaration relating to Permanent Establishment/Business Connection

ü Form 10F (if required)

TRC is the certificate issued by Revenue Authority of the country of which beneficiary is resident, for the purpose of taxation. Apart from TRC, beneficiary needs to submit Form 10F also in case any of the following information is missing from the TRC issued to him:

I. Name of the assessee

II. Status of the assessee (Individual, Firm, Company Etc.)

III. Nationality

IV. Country

V. Assessee Tax Identification or Unique Identification number of the relevant Country

VI. Residential status for the purpose of tax

VII. Validity Period of the certificate

VIII. Address of the applicant

To sum-up following table is useful to decide whether remittance is subject to WHT or not and what rates are to be used for WHT.

Nature of Income

DTL

DTAA

Business/Profession

Section 9(1)(i): Concept of Business Connection

Article 5;7;14: Concept of PE/Fixed Based

Salary

Section 9(1)(ii)

Article 15

Dividend

Section 9(1)(iv) and section 115A

Article 10

Interest

Section 9(1)(v) and section 115A

Article 11

Royalties

Section 9(1)(vi) and section 115A

Article 12

FTS

Section 9(1)(vii) and section 115A

Article 12 (Not in Mauritius)(Make Available Clause)

Capital Gain

Section 9(1)(i) and section 45: Source of Income Concept

Article 13

Grossing up of WHT (Section 195A)

Normally, in case there is any WHT liability, the non-resident beneficiary refuges to bear the same. In such case the payer has to pay the amount after grossing up of the taxes applicable, as the tax born by the payer would also be considered as income of beneficiary.

In this regard one should note the judgment of ITAT Bangalore in Bosch Ltd V. ITO where ITAT has held that in case beneficiary does not have PAN and due to which, WHT was done at higher rate i.e. 20% instead of rates in force, the grossing up does not need to be done on such higher rate but the rates in force.

Consequences of non-compliance:

There are penalties and other consequences in case of non-compliance of section 195 which are summarized as follows:

The above consequences may cause serious loss to the Payer in case of default, specially the last one. Therefore it becomes utmost indispensable requirement to comply with section 195 while making any foreign remittance.

Disclaimer: The write-up has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this write-up without obtaining specific professional advice. Author accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this write-up or for any decision based on it.

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