Detailed Analysis of Section 195- TDS on payments to Non-Residents
Introduction:
Income Tax Act, 1961 categorizes the taxpayers into two categories- Resident & Non-Resident assesses. Separate provisions and tax rates have been prescribed for non-resident in the Act. Where non-residents have been allowed preferential tax rates in respect of their income from royalties, interest, dividend and capital gains etc. as earned in India, at the same time, the Government also need to assure a proper mechanism of tax collection from non-residents. Section 195 of the Income Tax Act prescribes the provisions of tax deduction at source (TDS) with regard to any sum paid to non-residents. In this article, we will discuss the provisions of section 195 in detail with complete analysis thereof.
Section-195: TDS on payment to non-residents
“(1) Any person responsible for paying to a non-resident or to a foreign company, any interest or royalty or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “salaries” and not being interest covered by sections 194LB, 194LC and 194LD) 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
Provided that in case of interest payable by Government or a public sector bank or a public financial institution, deduction of tax shall be made only at the time of payment and shall not be made when such interest is credited to the account of non-resident or foreign company.
Explanation: For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies to all persons, resident or non-resident, whether or not the non-resident person has-
(i) A residence or place of business or business connection in India; or
(ii) Any other presence in any manner whatsoever in India.”
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Analysis: Section 195 states that where any person is responsible for making payment to non-resident or a foreign company, such person shall deduct TDS on such payments. Any person here means a resident as well as non-resident. To clarify this, Explanation-2 has been inserted to section 195(1). Accordingly, if a non-resident is responsible for making payment to any non-resident even outside India and such payment is chargeable to tax in India, such non-resident payer shall deduct TDS as per section 195 of the Act. This explanation has been inserted by Finance Act, 2012 with retrospective effect. TDS shall be deducted in respect of the following payments:
Exceptions: TDS in case of the following payments shall not be deducted under section 195 rather under other provisions as below:
Rates in force:TDS shall be deducted under section 195 at the “rates in force”. Rates in force here means TDS rates as prescribed under Part-II of First Schedule to Finance Act. Time of deduction of TDS TDS shall be deducted at the earlier of the following: Exception: If interest is paid by Government or a public sector bank or a public financial institution to a non-resident in respect of debentures/ bonds/ other securities, TDS shall be deducted only at the time of payment and not at the time of crediting interest to the account of non-resident or foreign company. |
Important Notes:
(a) All the payments made to a non-resident or a foreign company are covered under section 195. For example: an individual makes payment to a foreign architect for procuring services for his residential house shall also be liable for TDS u/s 195 even though the services are not procured for business purposes.
(b) There is no threshold limit for deduction of TDS u/s 195.
Following are the key factors which shall be kept in mind while determining the sums chargeable under the Act for the purposes of TDS u/s 195 i.e. whether the payment made to a non-resident is taxable in India or not in the hands of non-resident:
- Residential Status (Section 6)
- Scope of Income (Section 5 read with section 9)
- Special provisions applicable to non-residents (like section 115A dealing with tax on interest, dividends, royalty and fees for technical services etc.)
- Presumptive taxation scheme for non-residents under the head of “Profits & Gains from Business & Profession”
- Exercise of option to apply DTAA provisions if those are more beneficial
Rates of tax deduction in respect of non-residents or foreign companies
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Nature of payment to non-resident or foreign company |
Rate of TDS* |
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Income with respect of investment made by the non-resident |
20% |
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Income by way of Long-Term Capital Gain (LTCG) referred in section 115E |
10% |
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Income by way of Long-Term Capital Gain (LTCG) referred in section 112(1)(c)(iii) [LTCG on unlisted securities] |
10% |
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Income by way of Long-Term Capital Gain (LTCG) referred to in section 112A in excess of Rs. 1 Lakh Note: NRI shall not be allowed to take benefit of Rs. 1 Lakh threshold if they opt for section 115E special provisions. |
10% |
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Income by way of Short-Term Capital Gain (STCG) referred to in section 111A |
15% |
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Any other Long-Term Capital Gains |
20% |
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Income by way of interest payable by the Government or an Indian concern against money borrowed/ debt incurred by Government or Indian concern in foreign currency [other than interest referred in section 194LB or 194LC] |
20% |
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Income by way of royalty payable by the Government or an Indian concern in pursuance of an agreement where such royalty is in consideration for the transfer of all or any rights (including the granting of license) in respect of copyright in any book on the subject referred in section 115(1A) of the Act, to the Indian concern, or in respect of any computer software referred in second proviso to section 115A(1A), to a person resident in India. |
10% |
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Income by way of royalty payable by the Government or an Indian concern in pursuance of an agreement approved by the Central Government or where the agreement is in pursuance with the prevailing Industrial Policy. |
10% |
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Income by way of Fees for Technical Services (FTS) payable by the Government or an Indian concern in pursuance of an agreement made with the Government or Indian concern and where such agreement is approved by the Central Government or is in accordance with the prevailing Industrial Policy. |
10% |
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Income by way of winnings from lotteries, crossword puzzles, card games and other games of any sort |
30% |
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Income by way of winnings from horse races |
30% |
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Income by way of dividend |
20% |
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Any other Income |
Non-Resident (other than foreign company): 30% Foreign company: 40% |
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Note: The above rates of TDS shall be increased by surcharge and cess as prescribed from time to time. Presently, the rates of surcharge vary from 2% to 37% depending on the income and the nature of taxpayer. The rates of Health and Education Cess is 4%. |
Deduction of tax at lower rates or ‘nil’ rates
“Section-195(2): Where the person responsible for paying any sum chargeable under this Act (other than salary) considers that the whole of such sum would not be income chargeable in the hands of recipient, he may make an application in such form and manner to the A.O. to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under this section only on that proportion of the sum which is so chargeable.
Section 195(7): Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the official gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application in such form and manner to the A.O., to determine in such manner, as may be prescribed, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.”
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Analysis:
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“Section-195(3): Subject to rules made under sub-section (5), any person entitled to received any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the A.O. for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall so long as the certificate is in force, make payment of such interest of other sum without deducting tax thereon under sub-section (1).
Section-195(4): A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if its cancelled by the A.O. before the expiry of such period, till such cancellation.”
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Analysis:
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“Section 195(6): The person responsible for paying to a non-resident or a foreign company, any sum, chargeable or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.”
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Analysis:
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TDS Return & TDS Certificates Due dates:
The person deducting TDS is required to file TDS return in Form No. 27Q in respect of payments to non-residents (including foreign company)
Due date of Filing TDS return |
Due date of issuing TDS certificate |
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Applicability of Section 206AA
Section 206AA requires the payee to furnish his PAN to the payer (deductor). If the payee fails to furnish the PAN, the payer shall be liable to deduct TDS at higher rates. However, non-residents & foreign companies were facing genuine difficulties as they were not having PAN in India.
Finance Act 2016 relaxed the applicability of section 206AA in case of payment to non-residents which is in the nature of interest, royalties, fees for technical services and payment on transfer of any capital asset. Section 206AA would not apply to such non-residents if the following details are furnished to the deductor:
- The payee (deductee) shall furnish details like name, email-id, contact numbers
- The deductee shall provide the address of the country/ specified territory outside India in which he is resident
- The deductee shall furnish Tax Residency Certificate of his being resident in any country or specified territory outside India if the law of that country or specified territory provides for the issuance of such certificate
