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Author: Advocate Pallavi Parmar & Associate Debasmita Patra 

TDS or Tax Deducted at Source is the intermediary payment of income tax to the income tax department or government. “Tax evasion is a crime. Tax avoidance is not”. TDS is a useful tool introduced that the Income Tax department has introduced wherein a part of any specified payment like salary, fees, interest, rent, etc. is paid to the government. Amongst all the provisions that TDS consists of Section-195 is one with a broader scope than others. With all payers covered and no threshold exemption, this section deals with one of the essential forms of TDS- TDS on foreign payments.

As Section 195(1) of the Act goes on, “any person responsible for paying to a non-resident, not being a company or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provision of this act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of the cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate as in force.”

Under Section 195 of the Act, the following are ways in which TDS of non-resident Indians are deducted: 

1. The buyer has to first obtain Tax Deduction Account Number (TAN), according to Section 203AA of the Income tax Act, 1961, before claiming TDS deductions. Such TAN can be obtained vide Form 49B, available both online and offline. A major requirement regarding this is the availability of the buyer’s PAN number as well as that of the non-resident he’s dealing with in order to complete the submission process of Form 49B.

2. Under the same Section 195, TDS is supposed to be deducted from the source while disbursing payments to the non-resident individual. The sale deed between them shall contain all the details related to the TDS deductions and applicable rates.

3. The TDS, thus, deducted has to be deposited by the buyer through challan or a specific form on or before the 7th of the following month in which TDS is deducted.

4. TDS can also be deposited through banks authorized by the Government of India or the Income Tax Department to collect direct taxes.

5. After having deposited the TDS as per Section 195, the buyer is required to file TDS return through any electronic mode with the submission of Form 27Q. Returns on TDS are generally filed quarterly. TDS deductions made in any particular quarter must be submitted by the 15th of the month following the said quarter of the year. For instance, if TDS is deducted in the first quarter, that is, between 1st April and 30th June, the returns have to be filed by 15th July of the same year.

6. After the successful filing of TDS returns, the buyer can issue a TDS certificate, also known as Certificate of Deduction of Tax or Form 16A, to the NRI seller that is being dealt with. The issuance of the Certificate of Deduction of Tax is mandatory and has to be made within 15 days from the due date of filing for TDS returns of that specific quarter.

Amendment to the Finance Act, 1994, in 2009, makes Permanent Account Number (PAN) com  pulsory in case of payments eligible for TDS deductions. Failing the provisions will result in payment of TDS at a higher rate. The ruling, with effect from 1st April 2010, states that all transactions liable for TDS will be deducted at a higher percentage of 20 percent in case of non-availability of PAN of the payees. The law applies equally to all payments made to non-residents.

The newly introduced Section 206AA of the Income Tax Act, 1961, deals with the conditions wherein, a taxpayer is not eligible for subsidized TDS deductions due to lack of PAN details, be it resident or foreign payment that is being dealt with. Foreign residents, under this Section, should take an Indian PAN and provide it before payment. According to the Central Board of Direct Taxes (CBDT) states that Section 206AA will not applicable in case of different payments related to interest payment, payments of royalty, fees for technical services and transfer of capital assets among others.

 As per the Income Tax Act, 1961, Section 206AA requires a non-resident to provide PAN details to avail lower withholding rate which differs from country to country due to various treaty provisions. The lower withholding tax rate,  in case of foreign payments, is 10.51 percent (inclusive of cess) and 20 percent in the absence of PAN.

A non-resident, if in the case does not have a PAN, can now avail lower tax rates on the furnishing of the following prescribed documents to the payer:

· Name, e-mail address, and contact number

· Address of the non-resident’s country of residence

· Tax Residency Certificate (TRC), if the law of the respective country of residence provides for such certificate.

· Tax Identification Number (TIN) is the country of residence. In case TIN is not available, a unique identification number identified in the country of residence is to be furnished.

The above amendment is applicable with effect from 1st June 2016.

Some of the TDS rates applicable under Section 195 of the Income Tax Act, 1961, are as follows:

· Income from investments made by an NRI – 20%

· Income from Long Term Capital Gains under Section 115E for an NRI – 10%

· Short Term Capital Gains under Section 111A – 15%

· Interest payable on money borrowed in foreign currency – 20%

· Income from royalty payable by the Government or an Indian concern – 10%

· Income from royalty other than which is payable by the Government of an Indian concern – 10%

· Income from fees for technical services payable by the Government or an Indian concern – 10%

· Any other source of income – 30%