Over view of TDS provisions- chapter XVII, Collection & recovery of tax deduction at source
Provisions of WHT 1. PART A- GENERAL Ø Advance collection of tax by WHT, Ø Direct payment by the taxpayer 2. PART B - Forms of WHT/ TDS Ø Section 192 to 196D Ø Procedures of TDS Section 197 to 206AA 3. PART BB- Collection at source Ø Section 206C to 206CA 4. Part C- ADVANCE PAYMENT OF TAX Ø Section 207 to 219 5. PART D - COLLECTION AND RECOVERY Ø Section 220 to 232 6. PART F & G Interest / fee chargeable in certain cases Ø Section 234A to 234E WHT concept for nonresident Ø Compliance procedures Ø Determination and analysis Ø Applicability of the provisions Life-cycle of WHT provisions under section 195 Ø Scope of WHT Ø Compliance default Ø Alternate remedy for payee Ø Alternate remedy for payer Ø Quantifying WHT Ø Character of payment Ø Trigger point of section 195
Scope of WHT
Operative provision of Section 195 of the Income-tax Act, 1961 (IT Act) “Other sums. 195. [(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC)] [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) 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 a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force...”
Other clauses of Section 195
Clauses |
Other provisions applicable for section 195 of IT Act | | 195(2) | Application by "Payer" to Tax Authorities (AO) to determine appropriate proportion of income chargeable to tax | | 195(3) | Application by “Payee” to AO for NIL WHT certificate | | 195(4) | Validity of certificate issued by AO | | 195(5) | Powers of CBDT to issue Notifications | | 195(6) | Furnishing of information relating to payments | | 195(7)* | Authority of board to specify class of person or cases to make application under Section 195(2) | | 195A | Income payable “net of tax” Grossing-up |
Scope of WHT (2/2)
Responsibility of WHT Payers covered Ø “Any Person” Covered irrespective of their status - includes person under Section 2(31) responsible for paying (including individuals and HUF) Ø Payer itself in case of company, and the company includes principal officer Ø It also includes all non residents having taxable presence in India or not as per Explanation 2 to section 195 and Circular No. 726 dated 18 October 1995 or extra territorial jurisprudence Payees covered Ø Nonresident agent/ POA holder of a nonresident in India? Ø Resident but not ordinary resident RNOR? Ø Payment made to a foreign branch of an Indian company? Ø Foreign companies constituting. PoEM in India?
Trigger point for section 195 (1/3) Applicability of section 195 | Sum chargeable to tax | Timing of WHT | n All payments covered (exclusion specified), no threshold limit prescribed n "Any other sum chargeable". Composition provision: n Extends to whole of India & definition n Previous year and charge of Income-Tax n scope of Total Income : n Received or deemed to be received in India n Accrue or arises or deemed to accrue or arise in India n Residence in India n Amount paid that bears character of income on gross basis that may or may not represent income or profits, CBDT circular no. 152 of 1974.
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n Tax to be withheld at the time of payment / credit whichever is earlier n Tax to be withheld even where no remittance is made, adjustment of dues n WHT in cases where RBI approval is required n If no income accrues to nonresident irrespective of accounting system incorporating liability, no WHT. However, on cash basis n Payee must be identifiable / ascertainable n Time of deduction, from payers point of view and sum chargeable to tax in India from payee point of view |
Trigger point for section 195 (2/3) sum chargeable to tax brief insight n Where, payment made by resident to non-resident, was an amount not chargeable to tax in India, no tax is deductible at source as per CBDT instruction no. 2/2014 n Assessee liable to deduct ids under section 195 on payment made to non-resident even though payment is not made in cash but made in kind n Payer obligated to WHT, even if the receipt is not taxable in the hands of the payee in the country of residence n Sums not liable to tax in India on satisfaction of conditions, the principles are enunciated under circular 23/1969 and 786/2000 (now withdrawn) like (p to p, nonresident operates outside India, contract signed outside India, title of goods passed outside India, payment is directly remitted abroad, etc.). Payments to: n Agency commission payable to foreign agents; n Offshore supply of goods and equipments; n Consideration paid for outright purchase of designs and drawings is not royalty; n applicability of withholding tax to shipping company taxed under section 172; and n Does amount paid as penalty to the regulators chargeable to tax under section 195? n Any significant impact on withdrawal of the circulars? |
Trigger point for section 195 (3/3)
Specific exclusion for WHT under 195
Sections
| Particulars | 115-0 | Tax on distributed profits of domestic companies | 192 | Income from salaries | 194LB
| Income by way of interest from infrastructure debt fund | 194LBA
| Income from units of a business trust | 194LBB
| Income from units of investment funds | 194LBC
| Income of investment in securitization trust | 194LC
| Income by way of interest from Indian company | 194LD
| Income by way of interest on certain bonds and government securities | Other specific sections | 196B
| Income from units | 196C
| Income from FCCBS or GDRS of Indian companies | 196D
| Income from FIIS now FPI except capital gains |
Nature of Income | Basis of tax | Income chargeable under | (payee perspective) | | IT Act | Tax Treaty | Business / Profession income | Taxable if Business Connection in India or Property or asset or source of income in India or transfer of a capital asset is situated in India | Section 9(1 )(i) | Article 5, 7 and 14 | Capital Gain | Taxable if situs of shares/ property is in India | Section 9(1 )(i) | Article 6 and 13 | Dividends* |
Taxable if paid by an Indian company | Section 9(1)(iv) | Article 10 | (subject to DDT) | | Interest |
Taxable if sourced in India with certain exceptions | Section 9(1 )(v) | Article 11 | Royalties | Section 9(1)(vi) | | Fees for Technical Services (FTS) | Section 9(1)(vii) | Article 12 | |
Salaries* | Taxable if services are rendered in India | Section 9(1)(ii) | Article 15 |
Determining the nature of payment
The OECD BEPS Action Plan initiative Action Plan 1 - Digital Economy | Introduction of equalization levy on online advertisements | Action Plan 2 - Hybrid Mismatch & Arrangements | Part of Mil arrangement however, India has not included in its Mil commitment | Action Plan 3 - CFC Rules | Introduction of 'Place of Effective Management' Rules for tax residency | Action Plan 4 - Interest Deduction | Thin capitalization regulations introduced under Transfer Pricing Regulations | Action Plan 5 - Harmful Tax Practices | India not on the OECD harmful tax practices progress report list as update in May 2018 | Action Plan 6 - Prevent Tax Treaty Abuse | Included in the MLI arrangement. India has accepted the simplified LOB and PPT rules under the MLI document | Action Plan 7 - Avoiding Artificial PE status | Forming part of its provisional MLI commitment | Action Plan 8-10 - Transfer Pricing Recommendation | Revised OECD commentary incorporates the recommendations in the Action Plans for intangibles, Risk and Capital, etc. | Action Plan 11 - Measuring & Monitoring BEPS | No action taken yet | Action Plan 12 - Disclosure Rules | India yet to notify regulations for disclosure of aggressive tax positions | Action Plan 13 - Country-By-Country Reporting | Introduction of CbC reporting as per OECD norms | Action Plan 14 - Dispute Resolution | Forming part of its provisional MLI commitment | Action Plan 15 - Multilateral Instrument (MLI) | India adopted & notified all its 93 DTAAs to be covered under of MLIs with express reservations |
Snapshot of India’s major trading & investment partner countries
Applicable MLI with India
85 countries signed MLI (as on 21 Dec 2018) with India adopting Art.7 PPT + S-LOB; Art.12 DAPE; Art.13 Option A + anti-fragmentation | Key India tax treaty partners not signed MLI yet- existing treaties remain unaffected | India tax treaty partners signed MLI - existing treaties modified based on matching of MLI position of both countries | Treaty partners signed MLI but not included India in their provisional lists - existing treaties remain unaffected | USA, Brazil, Thailand | Australia, Canada, Cyprus, France, japan, Netherlands, UK, Luxembourg, Ireland, Italy, Prussia, south Africa, Singapore, Malaysia | Mauritius, china, Germany |
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Implementation of MLI | Ratified | Proposed to be ratified | 17 countries over all till 21 December 2018 | Australia, Austria, France | Singapore | Notable list of countries making effective are: | Lom, Israel, Japan, Newzealand, Sweden, UK | |
Quantifying WHT | Rates in force n Rates in force as defined under section 2(37a) of the it act n Rates of income-tax specified in it act/tax treaty under section 2(37a)(iii), beneficial rates to apply n CBDT circular no. 728 dated 30 October 1995 or740 dated 17/04/1996
n The exchange rate is applicable as per rule 26 - SBITT buying rate, what about rate fluctuations? n Rates prescribed under the tax treaty are inclusive of surcharge and education cess? n Tax to be house withheld under Section 195 : n Is on gross basis; and
n Withholding tax rate under section 195 is final
n Interplay between proposed equalization levy under Finance Act,2016 and Income-tax Act,1961 n Significance to obtain PAN while making the remittance to nonresident n Section 206AA, is non- obstante provision that override the IT Act effective 1-4-2010
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Quantifying WHT | Section 195a- income payable “net of tax” (grossing-up) n In the event of tax chargeable on any income is borne by the payer n For the purposes of WHT Under Section 195, income should be increased to such amount as would, after WHT theron at the rates in force, be equal to the net amount payable to the payee n Section 195A does not apply on notional income Under Section 44BB n Tax credit claimed by the payee to be restricted commercially - Compliance Under Section 203? n Can refund be claimed if taxes are withheld erroneously under Section 195? | Illustration of Section 195A: | Particulars | Amount in INR | Amount payable to nonresident
| 100 | Add: WHT (assumed to be 10% as per the tax treaty) grossed-up (10*100/90)
| 11.11 | Total income | 111.11 | Less: WHT applicable at 10% | 11.11 | Net amount payable to the nonresident (Recipient) | 100 | Friction between section 206AA and 195A-is section 206AA applicable for grossing Purposes and its legitimacy?
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Alternate remedy for the payer | Application by payer to the AO under section 195(2) and (4) | Application By Whom? | The application to be made by the payer before the jurisdiction tax authority | When to apply? | When the payer is in doubt and believes that the whole of sum payable is net chargeable to tax in India | Process | l Payer to approach tax authority to determine portion of income chargeable to tax l Online system validate certificate prescribed | Consequence | l AO may issue a certificate, determining the portion of income chargeable to tax l The permission is valid for the period specified l No specified time limit available to pass the order Under Section 195(2) | n Order under section 195(2) is: n Appealable after payment of tax
n Amenable to revision under section 263
n Decision under section 195(2) is inconclusive in determination of income in case of foreign entity |
Provisions for CA certificate | n Circular 10/2002 authorizes remittance of money through a CA certificate n CA certificate required also for trade payments- RBI circular no. 32 dated 19 July 2007 n Provision under section 195(6) introduced by the finance act, 2008 for CA certificate n Rule 37BB introduced by CBDT vide notification 30/2009 dated 25/03/2009 : n Forms 15CA and 15CB to remit payments to nonresidents and intimate the manner of disclosure : n Form 15CA, prescribed information to be furnished online by the payer; and n Form 15CB, prescribes format of CA certificate to be obtained n Taxpayer not absolved from penalty / prosecution if found that WHT was lower than required n CA certificate merely acts as a guidance and is not a substitute to adjudication by the AO n Procedure for remittance was amended from 01st October 2013, with significant change in the procedure, being more technological robust and detailed n Specified list of 28 payments like outbound investments, gifts, etc. Exempt from the procedures n Notification issued on 16 December 2015 to amend rule 37BB for new forms and compliances n Remittance certificate issued by CA subject to penal provisions prescribed per default |
Practice and Operational Rules | Rule 37BB amended effective 1 April 2016 with an aim to strike balance between burden of compliance and collection of information | n Individuals exempt to comply with form is CA and 15CB procedures if : n Payment or aggregate of such payment does not exceed INR 5 Lacs or specified list; and n Remittance does not require RBI approval under LRS and current account transactions specified list of remittances expanded to 33 for non applicability of rule and additions include: n Specific list of remittance expanded to 33 for non applicability of Rule & additions include : 1. Advance payment against imports | 2. Payment towards Imports-settlement of invoice | 3. Imports by Diplomatic missions | 4. Intermediary Trade | 5. Imports below INR 5 Lacs (for use by ECD offices) |
n Enhanced compliance of 15CA and 15CB information to be shared with principal director of income-tax (systems) including filing of quarterly information on remittance by the AD in form 15CC n revised form nos. 15CA and 15CB divided in 4 parts: Part A | Remittance does not exceed INR 5 lacs and amounts chargeable to tax | Form 15CA & 15CB | Mirror image of CA Certificate Perm 15CB where payments exceed INR 5 lacs | Part C | Part B | Subset of Part A and lower WHT certificate obtained under Section 195(2)/195(3)/197 | Sum not chargeable to tax under the provisions of the Act | Part D |
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Practice and operational rules | Amended procedures for CA certificate | Sample declaration from the payee | Amended procedures for CA certificate n only taxable remittances to be reported in form 15CA select form is CA in parts: n Part A: Applicable to remittances chargeable to tax for small payments that does not exceed INR 5 lacs or aggregate of such payments during the financial n Part B: for any other payments chargeable to tax and lower / nil WHT certificate is obtained n Part C: Form 15CA after obtaining CA certificate in form 15CB for sums chargeable to tax n Part D: Information of any sum not chargeable to tax form 15CA to be electronically uploaded on income-tax website. Amended process through generation of digital signatures for every payment n form 15CA to be electronically uploaded on income-tax website. Amended process through generation of digital signatures for every payment n Specific declaration / indemnity to be obtained by the payer for taxes and interest if payment is liable for WHT n Undertaking to be obtained from the payee | << On the letterhead of Payee>> Date : _________ TO WHOMSOEVER IT MAY CONCERN We, the Payee, hereby confirms as follows : 1.We are a Limited Company incorporated and registered in______ with Unique Entity Number______ . | 2.We are a tax resident of ______as per Article 4 of the tax treaty and the place of world assessment of our income is in______ | 3.We do not have any Permanent Establishment/Fixed place in India as defined under Article 5 of the Treaty. Also we will not have a Permanent Establishment/Fixed place in India within the meaning of the Treaty for the financial year. | 4.The amount payable and its nature under the tax treaty | 5.The amount is to be remitted to payee are the beneficiaries hereof. | 6.In the event there is any income-tax demand (include interest etc) raised in India in respect of this remittance we undertake to pay the demand forthwith and provide______ with all information/documents that may be necessary for any proceedings before income tax/appellate authority in India. | 7.Indemnity to protect from General Anti-Avoidance Rules For Payee |
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Practice and operational rules | Suggested method for CA Certificate | Tax Residency Certificate (TRC) | Steps | Action plan and approach | TRC requirement for nonresidents to claim tax treaty benefits Also confirmed by Circular on Section 206AA Furnishing of Furnishing of TRC mandatory to avail tax treaty benefits: SC in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) Circular 789 dated 13 April 2000 Shome Committee report on GAAR recommends that Circular 789 of 2000 should be retained Prescribed additional information to be furnished along with TRC CBDT clarified that the additional information prescribed may not be required if it already forms part of the TRC
Notification No. 57/2613 dated 1/08/2013[F.No. 142/16/2013- TPL] revised the Rule 21AB | Payment covered under Section 195 | Payment from resident or from non resident to nonresident | Verify factual documents | Invoice, Contracts, Legal Status, obtain declaration, PAN, etc. | Determine character | Classification of payment, Business profits, Royalty, FTS, etc. | Evaluate taxability under the | IT Act | Income-tax rates, Grossing-up, Section 206AA, Case law update | Tax treaty | No PE, TP analysis, beneficial owner, entity characterization, Article. LOB clause Obtain TRC. MFN, Protocol to the DTAA, MLI, OECD BEPS Technical explanation to the DTAA, Model commentaries | Specific orders | Verify specific orders received from tax authorities, 195(2), 195(3), etc. | Follow compliance | Complete the Form to comply with WHT deadlines for deposit |
Credit for Above article goes out to 'Shailendra Sharma'
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