I havent been able to find any answer through online research. So, I am posting here. Thanks in advance to all of you here and I am in need of your expertise!
As the title says, am I, as a Pvt Ltd Company required to deduct/gross up TDS on, for example, certain software license purchase through a foreign company's website (Billed in USD) which I pay through my Indian corporate Credit Card? If yes, how do I do it? If there is any caveat, please let me know!
Hey Rajiv! This is a good and practical question about TDS under Section 195 on payments to foreign companies, especially for software licenses bought online. Let me clarify:
Section 195 applies to any sum payable to a non-resident which is chargeable to tax in India.
Payment for a software license to a foreign company is typically considered royalty or fees for technical services under the Income Tax Act and relevant DTAA (Double Tax Avoidance Agreement).
Therefore, you are required to deduct TDS under Section 195 on such payments.
TDS rate depends on the nature of payment and the DTAA (if any) between India and the country of the foreign company.
Generally, royalty or technical service fees attract TDS at 10% (plus surcharge and cess) under many DTAAs.
If no DTAA applies, rate under domestic law (usually 10% plus surcharge and cess) applies.
The mode of payment (credit card or bank transfer) does NOT affect the liability to deduct TDS.
You are liable to deduct TDS at the time of payment or credit, whichever is earlier, even if payment is made by credit card.
The payer (your Pvt Ltd company) is responsible for deducting TDS, depositing it with the government, and issuing a TDS certificate (Form 16A) to the foreign payee.
If the foreign company insists on receiving the net amount after TDS, you need to gross up the payment.
This means you calculate the TDS on the gross amount, pay the TDS, and pay the foreign company the balance after deducting TDS.
For example, if you want the foreign company to receive $100, you calculate gross amount G such that:G - TDS @ 10% on G = 100
Solve for G → G = 100 / (1 - 0.10) = approx. $111.11
So you pay $111.11, deduct $11.11 as TDS, and remit $100.
Determine the nature of payment and applicable TDS rate (refer DTAA).
Calculate TDS on gross payment amount.
Deduct TDS at the time of payment/credit to foreign company (even if paid by credit card).
Deposit TDS to Indian govt within prescribed time and file necessary TDS returns.
Issue Form 16A (TDS certificate) to the foreign company.
Keep documentation proving the nature of payment and TDS compliance.
Check if the foreign company can claim tax credit in their home country for the TDS deducted.
Consult DTAA for lower TDS rates or exemption possibilities.
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