Today let us discuss about TDS on payment to NRI. To give a brief overview, we have Section 195 of the Income Tax Act which deals with this issue, and that section says that ANY payment to a non-resident attracts TDS at the rates in force. There are a lot of complexities in that section and I will try to decode the section and its implications that every NRI should know, in as less complex language as possible.
When you need to deduct TDS u/s 195
Deduction u/s 195 is required ONLY if a particular sum is chargeable to tax under the provisions of the Act – so, if any sum is paid to a non-resident which is not chargeable to him under the Income Tax Act, the obligation on payer to deduct TDS does not arise.
Some examples to understand this better:
Example # 1:
NRI Mr. A sells a flat to a resident Mr. B for INR 1 CR. Now, when Mr. B remits this INR 1 CR to Mr. A, a certain portion of this amount is chargeable to tax as capital gains in India– hence, Mr. B will have to deduct TDS on that amount from Mr. A.
Example # 2:
Mr. A sends INR 10 lacs to his son studying in a college in USA. Now, this amount is not one which is chargeable to tax – this is not a business transaction, but a mere remittance of money. Hence, TDS provisions will not be applicable to this money.
Example # 3:
Mr. A, an NRI plans to sell 100 equity shares of Reliance which he purchased 6 years ago. There will be no TDS on sale of these shares, as the long term capital gain on sale of shares is presently NIL.
What if payment is not exempt under ITA but under DTAA?
It may be also noted that a particular payment made by Indian resident to a Finland based NRI may be taxable under the Indian Income Tax Act but not taxable under India Finland DTAA. In this case, the clear view is that the TDS implication will not arise in such a case – this view has been confirmed in the case of Maharashtra State Electricity Board v. CIT [2004] 90 ITD 793 (Mum.)
Deduction u/s 195 should be on the full amount OR only on the income component?
This is a big grey area in the Income Tax Law. If you look at the wordings of the law, it says “any sum” which can lead one to infer that deduction has to be on the full amount and not just the income component. However, this flies in the face of basic principle of Income Tax law which says that for a sum to qualify for taxation, it has to fall within the four contours of “income”
In this regard, there was a decision by the Hon’ble Supreme Court in the case of Transmission Corpn of AP Ltd. vs CIT [1999] 105Taxman 742/239 ITR 547 and a more recent decision in case ofGE India Technology Cen. (P.) Ltd. vs Commissioner of Income-tax [2010] 193 TAXMAN 234 (SC)
The main points from these decisions are as follows:
- Decision on whether income is chargeable to ITA or not can be taken by the payer on his own. There is NO requirement to every time check with ITD on this issue if there is sufficient clarity at the end of the payer
- TDS need to be deducted on the “income” embedded in the remittance and not the full amount.
- In case payer is unable to assess the income component, he can then make a request to the ITD for the same through an application and that procedure is very well defined in Section 195.
- Section 195 mentions the word “payer” and not “assessee”. ONLY when the payer fails to discharge his statutory duty to deduct TDS does he become an assessee-in-default u/s 201 of Income Tax Act.
[Note: If you are a CA practitioner/student, you MUST read the full text of these two judgements word by word to get a complete hang of Section 195]
Practical side of TDS payment to NRI – what every payer should know
The above decisions give a lot of clarity on the application aspects of Section 195. One may argue that going by these decisions, assuming there is a sale of property by an NRI, the buyer can deduct TDS only on the capital gain amount and not the full sale consideration.
However, in my view, this is an incorrect approach. Unless there is crystal clear certainity on the income component in hands of payee (which is very difficult to establish), payer should generally request payee to apply to Assessing Officer under Section 197 for a lower/nil rate certificate else payer should proceed to deduct TDS on full consideration.
A lot of times, even CAs are not aware of this provision and they tell clients to deduct TDS on capital gain only. And this can have severe repercussions to the payer later on when he is treated as assessee in default by the ITD – and at that point, it is very difficult for payer to search for the NRI to whom the payment is made and check whether he filed proper tax return and deposited the due tax etc.
The understanding on TDS aspect has to be very much clear and documented – for example, the sale deed in case of a property transaction should expressly document the understanding on who will apply for TDS, how long the buyer should wait for the TDS certificate from ITD etc. so that there is no confusion later on, on this front.
In a few judgements cited below, the courts have also held that the TDS should be deducted on full amount, unless lower rate deduction certificate is applied for and obtained from ITD:
Syed Aslam Hashmi v. Income-tax Officer, (International Taxation), Ward 2(1), Bangalore[2012] 26 taxmann.com 6 (Bangalore – Trib.)
- There was a transaction of a sale of flat in Bangalore between two NRIs. The buyer NRI did not deduct TDS u/s 195 from the seller. Sale deed expressly mentioned seller’s address as that of Hong Kong meaning that seller was NRI
- Assessing Officer made buyer assessee in default w.r.t. the TDS amount on entire sale consideration
- Buyer claimed ignorance of this TDS requirement and the fact that his CA did not told him about this. Buyer also argued that TDS implication should be on capital gain amount
- Tribunal ignored buyer’s arguments and held her as assessee in default. Tribunal also held that since assessee did not apply for lower rate deduction to Assessing Officer, TDS had to deducted on entire sale consideration and not the capital gain amount only.
R. Prakash v. Income-tax Officer, International Taxation, Ward -2(1), Bangalore [2013] 38 taxmann.com 123 (Bangalore – Trib.)
- The assessee purchased a property for a total consideration of Rs. 1.20 crores. One of the co-owners of said property was a non-resident. Share of both co-owners were clearly mentioned as 50:50 in the sale deed. That co-owner had given a General Power of Attorney (GPA) to other co-owner who was a resident of India.
- The resident co-owner executed the sale deed in favour of the assessee for herself and as GPA holder of non-resident co-owner.
- Assessee did not deduct TDS on the portion of consideration attributable to the non-resident co-owner.
- In the course of assessment, the Assessing Officer opined that since one of the co-owners was a non-resident, the assessee was required to deduct tax at source under section 195 while making payment of sale consideration to her and on his failure to do so, he should be treated as ‘assessee in default’ within meaning of section 201(1).
- The Tribunal held thatIt is not in dispute that co-owners were entitled to half share each over the property and also the sale deed clearly acknowledges the receipt of sale consideration by both the co-owners in equal shares. To the extent of share paid to non-resident co-owner, the provisions of section 195 are attracted and the assessee ought to have deducted tax at source while making payments to her. Therefore, assessee can be considered as an ‘assessee in default’.
TDS on payment to NRI – Important points
- There is no threshold for Section 195 – payment of even a single rupee is covered
- Rates in force may mean either the rate that is expressly mentioned in the Act – for example, in case of long term capital gain, it is 20.60%
- TDS does not apply to salary payments, dividend on Indian equity shares (covered by Section 115 O), interest payments u/s 194LB, 194LC, 194LD
- Payer can be resident or non-resident – obligation extends even to a non-resident who does not have a residence/place of business/business connection/any form of presence in India
- If NRI does not furnish PAN, then the applicable rate is the rate in force or 20% whichever is higher u/s 206AA of ITA (this provision does not apply in case of interest income from long term bonds or a case where the applicable rate is as per DTAA)
- If NRI has accumulated balance of EPF, if PAN is not available, then the applicable TDS rate shall not be 20% but maximum marginal rate i.e. 35.535% (for FY 2016-17)
- If NRI lives in a notified jurisdictional area (i.e. Cyprus), the applicable rate is 30%.
- Payee can only be a non-resident (not a company) or a foreign company
- Deduction has to be at the time of payment or credit in the account, whichever is earlier.
- Payer or payee can individually apply to the Assessing Officer for a lower or a NIL rate of TDS deduction and if such a certificate is provided by AO, payer will deduct TDS at such reduced/NIL rate.
- Person making payment to non-resident (any payment – not necessarily chargeable to ITA) need to furnish information in Form 15CA/15CB to the ITD (refer my detailed post on Form 15CA CB compliances by NRI: Form 15CA/CB compliances by NRI: Procedure and Issues
- There are specific forms to fill by a person deducting TDS for payment to NRI – I have covered it in a separate post
TDS rates for payment to non-resident
Below are the TDS rates applicable to some of the most common payments – note that these links are for payment made in financial year 2016-17 i.e. applicable for AY 2017-18. Rates may change every year and revised rates are a part of Finance Act presented as part of the Union Budget.
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Implications of short/non-deduction of TDS or not filing of TDS return
If you’ve forgotten to deduct TDS or have short deducted TDS, you will be treated as an “assessee in default” as per Section 201 of the Income Tax Act.
In simple words, assessee in default means an assessee who has failed to pay the tax to the Income Tax Department. So, even in case where the ultimate tax liability for the income of the payee should be on the payee, the very fact that YOU failed to discharge your obligation to deduct the applicable tax will make you “assessee in default” w.r.t. the amount of TDS not deducted/short deducted.
The implications are as follows:
- Interest is applicable @ 1% from date when tax was due to be deducted to the date that it was actually deducted and 1.5% from the date when tax was deducted to the date tax was deposited in Government account
- Penalty at the discretion of Assessing Officer – no penalty can be levied unless mala fide intention of assessee is proved
- Late Fee u/s 234E for delay in furnishing TDS return = INR 200/day of default upto the tax amount
Some Issues w.r.t. TDS on payment to NRI
Issue # 1: if NRI does not have a PAN in India?
If seller does not have a PAN or does not provide PAN to buyer, provisions of Section 206AA come into play and the applicable rate will be higher of the following (this is irrespective of residential status of seller):
- Rate specified by relevant provision in the Act
- Rate in force
- 20%
Above is applicable irrespective of residential status of seller and/or in lower/NIL deduction certificate is provided.
However, there are some relaxations given by way of newly inserted Rule 37BC in Income Tax Rules which says the following:
Issue # 2: NRI wants to claim benefit of DTAA
- In this case, payee need to submit TRC – read Rule 21AB, Form 10F, 10FA, 10FB
- No surcharge will be applied to the treaty rate for TDS purpose, as the treaty rate is treated as inclusive of surcharge.
Hope the post has been of service to you. For personalised tax advice, you can reach me at contact@abhinavgulechha.com