Tds on foreign payment

Section 195: Other sums (i.e. TDS on payment to non-residents)

�Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this act shall at the time of credit of such income to the account of 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."

After a bare reading of the above, let us interpret the above catch note of section 195(1).

Who is liable to deduct tax?

Any person as defined in section 2(31) shall deduct tax, which would include residents as well as non residents. This means that non-residents are also obliged to deduct tax. This has also been provided by way of clarificatory retrospective amendments in Finance Act, 2012.

Who shall be the recipient?

The section covers all non residents in its ambit as others have been covered under other sections.

At what rate tax shall be deducted?

The tax shall be deducted at the rate or rates in

force as defined u/s 2(37A) i.e. the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into or notified by Central Government u/s 90 and 90A.

When the tax should be deducted?

As is evident from above tax shall be deducted 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. Further, the payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax at source being deducted. [Vijay Ship Breaking Corporation v. CIT - (2008-TII-07-SC-INTL)]

What is the threshold limit for deduction of tax?

There is no such threshold limit and tax is deductible even if payment is negligible.

At what amount tax shall be deducted ?

This point has been effectively dealt with by the Apex Court in Transmission Corporation of A.P. Ltd. and Another v. CIT reported in - (2002-TII-01-SC-INTL) in which SC opined as under :

1. Tax is deducted on ' any sum' on which income tax is leviable. That sum may be income or income hidden or otherwise embedded therein.

2. Scheme of TDS just not only applies on amount paid which wholly bears �income" character such as salaried, dividend, interest on securities but also to gross sums the whole of which may not be income or profits of recipient, such as payment to contractors

3. The said TDS provisions are meant for tentative deduction of income-tax subject to regular assessment .

Following points also need consideration:

As mentioned in section 195(2) and clarified by CBDT Circular No. 152 dated 27-11-1974 that where whole of the sum being paid would not be income chargeable to tax in the hands of recipient non-resident, person responsible for paying such sum may make application to AO for determination of appro­priate portion of such sum which is so chargeable and tax to be deducted accordingly.

New sub section (7) has been inserted in section 195 w.e.f. 1.7.2012 wherein it has been provided that CBDT may, by notification specify a class of persons or cases, where the person responsible for paying any sum to a non-resident, whether taxable or not, shall make an application to the Assessing Officer to determine appropriate proportion of sum chargeable to tax.

Objective of Section 195

As it clear from above discussion and circular that tax due from non-resident persons should be secured at the earliest point of time so that there is no difficulty in collection of tax subsequently at the time of regular assessment. This will obviate the difficulty in chasing such foreign nationals for recovery of their tax dues subsequently, due to jurisdictional and other operational difficulties. Further most such foreign nationals are likely to have nil or at best very meager assets in India which may be totally inadequate to recover the tax dues.