Understanding TDS on Payments to Non-Residents: A Comprehensive Guide

Tax Deducted at Source (TDS) is a mechanism under the Indian Income Tax Act, 1961, designed to collect tax at the very point of income generation. Section 195 specifically deals with TDS on payments made to non-residents. This article aims to demystify the key aspects of TDS compliance for non-resident payments, making it accessible to individuals and businesses alike.

1. Applicability of Section 195

Any person responsible for paying to a non-resident (other than a company) or to a foreign company, any interest or any other sum chargeable under the provisions of the Act (excluding salaries), is required to deduct income tax at the rates in force.

2. Determining the Applicable TDS Rate

The rate at which TDS is to be deducted is determined by the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial to the assessee. For instance, while the Income Tax Act prescribes a 20.8% rate for royalties and fees for technical services, the DTAA rates may range between 10% to 15%, depending on the country.

3. Permanent Establishment (PE) Considerations

If the non-resident has a Permanent Establishment (PE) in India, higher tax rates apply based on the payment amount. For example

• Amount exceeding ₹1 Crore: 40% + 2% Surcharge + 4% Cess = 42.432%
• Amount exceeding ₹10 Crores: 40% + 5% Surcharge + 4% Cess = 43.68%

4. Requirement of Tax Residency Certificate (TRC) and Form 10F

To avail benefits under the DTAA, non-residents must furnish a Tax Residency Certificate (TRC) and Form 10F. The Central Board of Direct Taxes (CBDT) mandates electronic filing of Form 10F, and provisions have been made for non-residents without a Permanent Account Number (PAN) to file it online.

5. No Threshold Exemption

Section 195 does not provide any threshold exemption. This means TDS must be deducted even if the payment amount is nominal.

6. Surcharge and Education Cess

While the rates prescribed under the Income Tax Act are subject to surcharge and education cess, DTAA rates are inclusive of these components. Therefore, no additional surcharge or cess is applicable beyond the treaty rates.

7. TDS on Presumptive Income

Certain non-resident business incomes are taxed on a presumptive basis under Sections 44BB to 44BBB. In such cases, TDS should be deducted only on the income portion. For example, income from the operation of ships is taxable at 7.5% of the gross receipts under Section 44BB, so TDS is required on this income element.

8. Payments Between Non-Residents

Section 195 also applies to payments made by a non-resident to another non-resident if the income is taxable in India. This includes payments made outside India.

9. TDS on Payments in Kind

TDS provisions apply even to payments made in kind. The Supreme Court upheld the extraterritorial application of Section 195 in the case of GVK Industries Ltd

10. Exempt Income

No TDS is required on income that is exempt under the Income Tax Act. However, it’s crucial to ascertain the taxability of the income before making any payment to a non-resident.

11. Currency Conversion

For payments made in foreign currency, the amount is converted using the telegraphic transfer buying rate. If the payer bears the tax liability, the payment amount is grossed up to compute the TDS.

12. Higher TDS Rates for Non-Residents Without PAN

Non-residents without a PAN may face higher TDS rates. However, relaxations exist under Rule 37BC, which allows certain non-residents to be exempted from higher TDS rates if they furnish specified details.

13. Lower or Nil Deduction Certificates

Both payers and payees can apply for certificates for lower or nil deduction of TDS. The payee can apply using Form 13, while the payer can apply using Form 15E. These applications are made to the Assessing Officer.

14. Mandatory Forms for Remittances

For remittances to non-residents, Forms 15CA and 15CB are mandatory. Form 15CA is a declaration of remittance, while Form 15CB is a certificate from a Chartered Accountant. Certain categories of remittances are exempted from this requirement.

15. Compliance Requirements

• Payment of TDS: The deducted TDS should be deposited through a challan on or before the 7th of the next month.
• Quarterly Return Submission: Form 27Q must be submitted quarterly for TDS on payments to non-residents.
• TAN Requirement: Deducting TDS under Section 195 requires a Tax Deduction and Collection Account Number (TAN).

Conclusion

Navigating the complexities of TDS on payments to non-residents is crucial for compliance with Indian tax laws. Understanding the provisions of Section 195, the applicability of DTAA, and the associated compliance requirements ensures smooth international transactions and avoids potential legal complications.