Tax Withholding Provision u/s 195 of Income Tax Act (ITA)
- Section 195 of ITA casts obligation on every payer to withhold tax at the time of payment or recognizing credit in favor of non-resident on any sum which is chargeable to tax in the hands of non-resident recipient with the objective to ensure tax compliance by non-residents and obtaining information of foreign remittances.
- Consequences of failure to deduct or pay correct tax: the principal officer of a company may be deemed to be an assessee in default in respect of such tax and subject to penal actions independent of CA certificate in Form 15 CB.
- Who is covered?
Payer: both resident or non-resident whether or not he is having a residence or place of business or business connection in India or any other presence in any manner whatsoever in India and Payee: Non resident (other than company) & Foreign Company whether resident or non-resident.
- What is not covered:
- Salaries; Dividends; Interest [S. 194LB, 194LC & 194LD]; Income from units of a business trust [S. 194LBA]; Payments to sportsman, entertainer or sports association [S. 194E]; Winnings from Lottery, etc. [S. 194B]; Income received by a unit holder of investment fund [S. 194LBB]; Payments u/s.115AB, 115AC, 115AD [S. 196B, 196C & 196D]
- Sum payable is exempted; Example Shipping income u/s. 172; Interest paid by Offshore Banking unit to an NR or RNOR [S. 197A(1D)]; Capital Gain earned by FII [S. 196D(2)] Hyderabad Industries Ltd. 188 ITR 749 Kar
- Activities performed outside India are not taxable in India. No TDS EXCEPT FTS
- Income which is not accrued to payee;
- What is covered:
- Interest other than [S. 194LB, 194LC & 194LD] or any other Sum chargeable under the provision of ITA (Not being income chargeable under the head Salaries).
- Whether partly or fully chargeable to tax; if partly taxable then payer need to approach to AO u/s 195(2) to know how much amount is taxable. Case: (1) Transmission Corp. 239 ITR 587 (SC) (2) GE India Technology Cen. Pvt. Ltd. – (193 Taxman 234) 2010 SC
Circulars clarifying CBDT understanding: CBDT circular no. 02/2014 dated 26.2.2014 states that interest u/s. 201 will be on portion representing income (not the whole amount) CBDT circular no. 03/2015 dated 12.2.2015 states that disallowance u/s. 40(a)(i) will be on sums chargeable to tax (not the whole amount)
Conclusion: In view of growing economy and automation of tax compliance procedures it is very pertinent to note that any inefficiency in tax compliance can be of great consequences and moreover it is our onerous duty to get due taxes for our Government; Nothing more & Nothing less. In this series, we shall be put before you all aspects of International Taxation which may help us to comply our responsibility effectively and efficiently.