Dear Mr. Nandkumar,
Please note the following opinion is only valid for Deduction of Tax at Source and it nowhere affect the actual tax liability of a Non resident.
Section 195 read as
195. (1) 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 (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 :
Interpretation
For Deduction of Tax u/s. 195 rate of tax shall be rates in force.
Section 2(37A) defines rate in force
(37A) “rate or rates in force” or “rates in force”, in relation to an assessment year or financial year, means—
(iii) for the purposes of deduction of tax under section 195, 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 by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be
Interpretation
For Deduction of Tax u/s. 195 rate of tax shall be rates in force i.e. rate prescribed under relevant Finance Act or rates prescribed under relevant DTAA.
Section 90(2) provides for overriding effect of provision of DTAA over Income Tax Act.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
Interpretation
For Deduction of Tax u/s. 195 rate of tax shall be rates in force i.e. rate prescribed under relevant Finance Act or rates prescribed under relevant DTAA, whichever is beneficial to assessee.
Example:
Particulars
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As per
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Finance Act
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Indo-UAE DTAA
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Interest from NRO Fixed Deposit earned by resident of UAE
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30%
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12.5%
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Rate of TDS u/s. 195 r.w. section 90(2)
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12.5%
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Section 69 of Finance No. 2 Act, 2009 inserted new section 206AA in Income Tax Act w.e.f. 1st day of April, 2010, namely:—
206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:—
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent.
Interpretation
For Deduction of Tax u/s. 195 rate of tax shall be rates in force i.e. rate prescribed under relevant Finance Act or rates prescribed under relevant DTAA, whichever is beneficial to assessee. However, after insertion of Section 206AA, the rate of TDS under section 195 shall be higher of rate in force or twenty per cent (20%) i.e. 20%.
Example:
Particulars
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As per
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a. Section 206AA
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b. Finance Act
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c. Indo-UAE DTAA
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A. Rate in Force for Interest from NRO FD earned by individual resident of UAE not having PAN.
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N.A.
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30%
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12.5%
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Rate in force (rate of TDS u/s. 195 r.w. section 90(2)) on or before 31st March 2010.
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Lower of above “b” or “c” i.e. 12.5%
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Particulars
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d. As per 206AA (1) (iii)
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e. Rate in Force
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B. Rate of TDS on or after 1st April 2010 for “A”
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20%
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12.5%
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Rate of TDS u/s. 195 r.w. section 206AA on or after 1st April, 2010.
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Higher of “d” or “e” i.e. 20%
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In my opinion, based on above explanation, rate for deduction of Tax at source u/s. 195 for Non resident who is not having PAN, on or after 1st April, 2010 shall be 20% and shall be increased by additional Surcharge.
It is to be noted that, rate of 20% is only applicable for TDS purpose and Non residents can claim benefit of DTAA and its actual tax liability shall be as per rates prescribed under DTAA (12.5%). To claim refund of excess TDS he can file Return of Income for which he is required to have PAN.
Thanks and Regards
Juzer