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Detailed Analysis of TDS on Non-Resident Payments

TDS-rate-chart
blog dateJun 20, 2020 | 7 min read | views 58389

TDS on non-resident payment has always been a complex area of Income Tax Compliances. Detailed analysis is required to be performed to each transaction to understand TDS on foreign payment before you can initiate a payment. Wrong TDS on foreign party may put your company at greater risk in later years when the assessment is done.

TDS on non-resident payments needs to be analyzed under section 195 of the Income Tax Act 1961.

Under section 195 of the Income-Tax Act, when a person makes a payment by way of interest or any other sum other than salary to a foreign company or NRI, tax should be deducted at source at the rate applicable at force.

To identify the TDS rate on payment to non-resident, one has to follow the below sequence:

S.No Question to be asked Possible Response Expert opinion
1. Does the payment relate to Import of Goods or services? 1.Goods 2.Services 1. Goods: No TDS 2. Services: Refer below
2. Is there any specific section under which TDS on foreign payments has been announced (Refer Below List of Specific Sections announced for TDS on Non-resident payments) 1.Yes 2.No 1. Yes - Deduct TDS based on rate prescribed in respective section or respective DTAA rate of the country of residence of foreign party whichever is lower 2. No - Refer below
3. Will the payment be treated as any other income not referred else in any other section for non-resident taxation? 1.Yes 2.No 1. Yes - analyze if foreign party has any business connection (PE in India) 2. No - No TDS to be deducted
4. Does the foreign Party has PE in India 1.Yes 2.No 1. Yes - analyze if foreign party the payment being made is connected to that PE in India. If Yes, refer below 2. No - No TDS to be deducted
5. Analyze if the income can be considered to be arising or accruing in India u/s 9 of the Income Tax Act 1.Yes 2.No 1. Yes - Deduct TDS as per normal Income Tax Rates or rates as per DTAA whichever is beneficial 2. No - No TDS to be deducted

The above steps for non-resident TDS deduction must be adhered by companies. Chartered Accountants must follow above steps to issue 15CB certifications.

Specified category of Non-resident Income Tax:

S.No Nature of Payment TDS Rate
1. Income by way of Salary As per Slab rate of Salary
2. Income by way of long-term capital gains referred to in Section 115E in case of a Non-resident Indian Citizen TDS rate as per Section 115E or DTAA whichever is beneficial
3. Income by way of long-term capital gains referred to in sub-clause (iii) of clause (c) of sub-Section (1) of Section 112 TDS rate as per Section 112 (1) (c) or DTAA whichever is beneficial
4. Income by way of interest payable by Government or an Indian concern on moneys borrowed or debt incurred by Government or the Indian concern in foreign currency (not being income by way of interest referred to in Section 194LB or Section 194LC) TDS rate as per Section 194LB/194LC or DTAA whichever is beneficial
5. Tax on dividends, royalty and technical service fees in the case of foreign companies (Section 115A) TDS rate as per Section 115A or DTAA whichever is beneficial
6. Tax on income from units purchased in foreign currency or capital gains arising from their transfer (Section 115B) TDS rate as per Section 115B or DTAA whichever is beneficial
7. Tax on income from bonds or Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer (Section 115C) TDS rate as per Section 115C or DTAA whichever is beneficial
8. Tax on income from Global Depository Receipts purchased in foreign currency or capital gains arising from their transfer (Section 115ACA) TDS rate as per Section 115ACA or DTAA whichever is beneficial
9. Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer (Section 115AD) TDS rate as per Section 115AD or DTAA whichever is beneficial
10. Tax on non-resident sportsmen or sports associations (Section 115BBA) TDS rate as per Section 115BBA or DTAA whichever is beneficial
11. Capital gains on transfer of foreign exchange assets not to be charged in certain cases (Section 115F) TDS rate as per Section 115F or DTAA whichever is beneficial
12. Specific Deductions /allowances while calculating income of non-residents (Section 115C) Consider the allowance while calculating income
13. Any other specified section which may be announced in future Please check if any section is announced to charge tax on non-resident, consider rate mentioned in that section

Other key considerations in non-resident TDS deduction:

  1. If full payment is not income, you can apply to AO with income calculation and AO can approve the amount of income on which TDS on foreign parties to be deducted.
  2. To Apply benefit of DTAA, a valid tax residency certificate must be obtained from the party
  3. To conclude no business connection in India, You must obtain ?No PE Certificate? from the foreign party on the date of payment /accrual
  4. There is always an over-lap between ?Fee for technical services? and Business income of foreign party. TDS on fee for Technical Services or ?FTS? must be analyzed with utmost care to avoid litigations in future assessments. Please analyze the definition of fee for Technical Services as given in the section and evaluate if the payment will quality for FTS or not. If payment doesn?t qualify for FTS, it can be treated as business income of Non-resident and may not be chargeable in India.

You can reach out to author at vm@tya.co.in if you shall have any specific queries on non-resident taxation.

Refer our separate discussion on TDS on residents.

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Vikas Mandawewala

Vikas Mandawewala is a Rank Holder Chartered Accountant and Rank Holder Company Secretary.
He has done his CPA (US-NY and US-CO), CIA (US), and CISA (US). He is also a Registered Valuer (India). He has been providing Virtual CFO services to various startups and mid-sized companies in India.
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