With the economic growth, the transactions between Indian taxpayers and non-residents are increasing. For all these transactions, the taxation on all the sums which are payable to the non-residents is deducted at source. The payee is bound to pay the tax deduction at source (TDS) at specified rates. This has been dealt in Chapter XVII-B of the Income-Tax Act, 1961 (The Income Tax Act). Here is a detailed overview for better understanding of TDS on payments to non-residents. A wrong transaction will lead to incorrect assessment. Therefore, one needs to know the legal framework relating to TDS in respect to non-resident payments.
Who is a Non-Resident?
Section 2(30) of the Income Tax Act, defines a non-resident Indian as a person who does not reside in India and has all his income accruing outside India. If the income has no relation with India, it would not be taxable in India. Apart from this all the income is taxable, if the income accrues/deemed to be accrued/received/deemed to be received in India.
Total Income
Income Tax Section 5 defines total income, it states that income of a non-resident includes the income derived from a source, which is received/deemed to be received in India/accrues/arises/deemed to accrue/arise in India during the year of assessment.
All direct first receipt of income will be liable to tax if received in India even though accrued outside India. But if the income received abroad is remitted to India, it cannot be taxable on the receipt unless it is taxable.
What is TDS?
The whole concept of TDS was implemented for collection of tax at the source. A person making payments to any other person shall deduct the tax at the source. The person from whom TDS is deducted at source can get credit of the amount by filing Form 26AS (TDS certificate).
The rates of taxation at source in given in the Income Tax Act and the First Schedule of the Finance Act. In respect of payments to any non-residents in India the tax rates for TDS is specified in the Double Taxation Avoidance Agreements.
Legal Framework relating to TDS on Payment to non-residents
Section 195 under Chapter XVII-B of the Income Tax Act states that any person who is liable to make payments to non-residents and foreign companies by way of interests or any other sum which is other than salary to the foreign company will be liable to deduct TDS. The tax will be deducted at source.
The TDS will be deducted on payments of any interest other than interest in section 194LB, 194LC and 194LD, royalty and any other amount chargeable under Income Tax Act. TDS can be deducted on any sum chargeable under Income Tax Act but not being income under “salaries” head in the Act.
When to deduct TDS under section 195?
TDS can be deducted at the time of credit or at the time of payment whichever is earlier. If the interest is payable by the government or a public sector bank or a public financial institution, then the deduction shall be made at the time of payment only and not at the time of crediting interest to the non-resident’s account.
TDS Rate
The TDS rate is decided as per chapter XVII-B of the Income Tax Act. If the payee doesn’t have a PAN, then TDS is either deducted according to chapter XVII-B or 20% whichever is higher.
While calculating TDS rates one needs to look into the Double Taxation Avoidance Agreement (DTAA) of the respective country. If the payee qualifies under DTAA then the prescribed rates will apply.
Here is the list of TDS rates with reference to payment to non-resident other than foreign companies for Assessment Year 2022-23-
| Section | Particulars | TDS Rate |
| 192 and 192A | Payment of salary and It is for the payment of the accumulated balance of the EPF which is taxable at employee’s end. | 10% |
| 194B and 194BB | TDS rate in case of winning the lotteries, puzzles or horse race etc. | 30% |
| 194E | Payment to a non-resident sportsmen or association | 20% |
| 194EE | For the payment regarding NSS deposits | 10% |
| 194F | For the repurchase of Mutual Funds units | 20% |
| 194G, 194LB 194LBA(2) | Payment relating to the commission on sale of lottery tickets, infrastructure debt fund. | 5% |
| 194LBB | investment fund paying income to unit holders. | 30% |
| 194LBC | Income distribution under securitization trust | 30% |
| 194LC | For the payment of interest by an Indian Company or any business trust with respect to the money borrowed in foreign currency under a loan agreement or by the issue of long-term bonds which includes long-term infrastructure bond. | 5% |
| 195 | Other payment relating to non-residents | 10-20% |
| 196B, 196C, 196D | Payment relating to the income from units to an offshore fund, foreign currency bon or securities. | 10-20% |
Threshold limit on taxation
There is no threshold limit on taxation. But tax has to be deducted on the total sum chargeable for tax. If no sum is chargeable to tax, then no tax is deducted.
Chargeability of income under Income Tax Act
If a non-resident has income which deems to accrue or arise in India, then the payer has to withhold taxes in India. Some of the income which is deemed to accrue or arise in India are income under the head of salaries earned in India, salary paid by Central Government to Indian Citizen for services rendered outside India and dividends.
Applicability of Section 206AA (Form 15CA and 15CB)
Earlier, under section 206AA, the payee had to furnish his PAN to the payer, if he fails then the payer would be liable to deduct higher TDS. The non-residents were having difficulty as they didn’t have PAN.
Therefore the government in 2016 has relaxed the applicability of section 206AA when the payment relates to non-residents.
Section 206AA will not apply to non-residents furnishing the following details to the payor:
- The payee shall furnish all the key details like name, contact numbers and email ID.
- They have to provide the address of the country in which they reside.
- The payee has to furnish Tax Residency Certificate of his native country if the country provides for the issuance of the Tax Residency Certificate.
What is DTAA?
Double Taxation Avoidance Agreement i.e. DTAA is an agreement between two countries for avoiding double taxation on the same income in both the countries. The non-resident payee has to submit Tax Residency Certificate (TRC), PAN card, self-declaration and the passport and visa copy to avail the TDS rates as per DTAA.
Tax residency certificate
A Tax Residency certificate (TRC) is a duly verified certificate. It is issued by the Government of the country of which non-resident claims to be a resident for the purpose of taxation. This certificate can be obtained from the Government or tax authorities of that particular country of the non-resident.
Agreement with foreign countries
In order to ascertain the taxation of sum payable to non-resident, one has to examine section 5, 9 and 115A of the Income Tax Act.
If such sum is not taxable in India, then no tax will be deducted at source under section 195 with respect to the payment of such sum. However, if such a sum is found to be taxable, then one has to examine whether he is entitled for relief under DTAA.
Procedure to deduct the TDS under section195
Firstly the remitter as per section.195(6) & rule 37BB need to obtain the form 15CB from a CA while remitting the payment to non-resident and then they need to file form 15CA in online mode for remitting the payment. After filing form 15CA, he has to print out and submit the signed form to their banker or AD to remit the payment.
Other key considerations in non-resident TDS deduction
- In case the payment is not income, then the person has to apply to Assessing Officer and Assessing Officer can approve the amount on which TDS is to be deducted.
- When a person has to avail the benefit of DTAA, he should have valid tax residency certificate.
- If the payment relates to import of goods or services then no TDS is deducted.
Conclusion
When taxpayer makes payment to non-residents, they face a lot of ambiguities while deciding whether there is TDS in respect of the payment to non-residents. If an Indian entity is responsible for paying interest or any other sum to a non-resident, they have to check whether the interest or sum is taxable in India. If it is not taxable, then no tax would be deducted. If the payment is chargeable to tax, then they need to check the relief available to the non-resident under DTAA and then the TDS is deducted at source. Section 90 explicitly talks about this and provides a choice to the non-resident for tax assessment.
