Analysis of Section 195 of Income Tax Act, 1961.
Introduction : Whenever any payment is made to any non-resident than whether it is subject to TDS or not what will be the rate of deduction and whether there is any exemption from deduction of TDS; all the relevant points has been covered under section 195 of Income Tax Act, 1961. In this article we will cover all the relevant provisions relating to tax deduction at source in case of payment to non-resident.
To whom Section 195 is applicable?
It has been stated under section 195 of Income Tax Act, 1961; that in case of any person responsible for making payment to any non-resident will be required to deduct tax at source. This implies that if any Resident is making payment to non-resident than the section will get triggered and if any non-resident is making payment to non-resident than also section will get trigged.
The question arises that whether any person residing outside India has to follow the provision of India?
Through insertion of explanation (1) to section 195, it has been provided that even in cases where person is non-resident and he is making payment to non-resident, then also he will be liable to deduct TDS on such payment.
Interpretation of our Expert’s: In case where payment is made by non-resident to another non-resident and it is the case were such income has been received in India or accrued in India (or both)and any one person of above two is bond to comply with Indian laws and regulations than TDS should be deducted on such payments.
Whether person being resident but not ordinary resident is covered under section 195?
It has been stated under section 195 that the provision will be applicable only in case were payment is been made to non-resident person. The said provision is not applicable to the person if the person is resident or in case if person is resident but not ordinary resident.
Whether there is any threshold limit?
It has been stated that on case of payment of Any Sum to non-resident TDS is required to be deducted. Therefore, there is no threshold limit. It shall also be noted that deduction of TDS is applicable to any payment chargeable under the provisions of Income Tax Act. Therefore, provisions are equivalently applicable to revenue from sale of goods and revenue from sale of service.
What if person required to make the payment, pays the amount without deduction of TDS?
In case if person required to make the payment, pays the amount without deduction of TDS than in such in that case principle of grossing will be applicable. According to said principle if person is required to make the payment of Rs. 2,000/- and makes such payment without deduction of TDS where rate of TDS is 10% than in that case gross amount for purpose of calculation of TDS will be Rs. 2,222/- and the amount of TDS that person will be liable to pay to government will be Rs. 222/-.
Whether there is any other remedy for the person to reduce the amount on which TDS is to be deducted?
As per section 195(2) of Income Tax, 1961; assessee can make an application to the assessing officer to determine the appropriate proportion of such sum which is chargeable to tax on that portion payer will be liable to deduct TDS. Further in case if on such certified amount if TDS is not deducted than in that case disallowance of expenditure related to such expense on which TDS is not deducted will be limited up to the amount of certified income.
What will the rate of TDS?
No such specific rate has been prescribed, it has been provided that TDS will be deducted at the rate in force or rate prescribed in Double Taxation Avoidance Agreements between India and the country of the payee whichever is more beneficial to assessee. The rate in force for financial year 2021-22 is 10.4% (after cess). In case if the payee doesn’t have a PAN then rate could be rate in force or 20% whichever is higher which is also to be increase by applicable cess rate.
Which are the payments which is not been covered under 195 of Income Tax Act, 1961?
In case payment is in nature of salary 192 or payment is on account from winning from lottery or crossword puzzle or any other sort of game 194B/194BB, in case where payment is relating to non-resident non-citizen sportsperson/athlete where TDS is applicable under section 194E or where payment is relating any specified income given under section 195LB/LC/LD or where the section specifically covers non-residents.
How the assessee can make the payment to non-resident?
It has been stated that person being payer is required to obtain the form 15CB from a Chartered Accountant while remitting the payment to non-resident and will be required to file the form 15CA (undertaking by payer). The said form is to be furnished in online mode under income tax website through their PAN login. The acknowledgement of 15CA and form 15CB will be required to be submitted to their banker/AD to remit the payment.
What are the consequences in case in person liable to deduct TDS does not makes deduction of TDS?
In case there is non-compliance to section 195 than following will be the consequences:
- Disallowance of the particular expenses u/s.40(a)(i) (In case TDS is not deducted)
- In case were TDS is deducted but not paid, then payer of amount will be liable to pay interest @ 1.50% per month or part of the month from the date of deduction to date of deposit. Also, in said case (TDS is deducted and not paid) penalty is levied which will be equivalent to amount of TDS.
Further if it is the case of short deduction penalty equivalent to difference between actual deductible and deducted amount will be levied.
What if amount paid by the payer is exempted in hands of recipient?
In case if amount is paid by the payer is exempted in hands of recipient, then in said case the payer will not be required to deducted the tax on amount paid by him.
Through this article we have tried to resolve some of the question that will arise in mind of assessee while making payment to non-resident.