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:
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.
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:
Published by CA Pravesh Goel
Pravesh is a Chartered Accountant and Commerce Graduate from Delhi University. He lives in Delhi. He has in-depth knowledge on subjects like International Taxation, Domestic Taxation both Direct & Indirect, Risk Management, Controls Setup and Information Technology. With his ability to design system operated controls, he has helped many small to large enterprises in setting ups financial as well as non financial controls thereby mitigating the Risks they were exposed to. He can be reached at pravesh@nucleusadvisors.in or +919999957077
