TDS On Non Residents
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TDS On Non-Residents Section 195, Income Tax Act, 1961

Introduction

TDS is the method of collection of taxes by the government at the time of earning of income to the assessee. The rates and the method of collection is varies based on the types of income and transactions carried out by the assessee. In some sections, it is deducted at the time of payment, and in some sections, it is deducted the time of credit or payment whichever happens earlier. Out of the Provisions of the TDS under the Income-tax Act,1961, one of the sections is Section 195. Section 195 explains the provisions of TDS on income of Non-Residents. In this article, we will discuss the provisions and FAQ in section 195.

Q.1 Who is Non resident?

To Determine the residential status of any person in India we have check some basic and additional conditions given under section 6 of the income tax act,1961. Under Section 195 only person who is Non-Resident is covered, but RNOR are not covered.

Q.2 Who is the Payer u/s 195?

Any person who is making payment to a Non-Resident person is covered under this section irrespective of the status of the payer like Individual, Huf, corporates, Firms etc. Hence all are required to deduct TDS if they are making payment to a Non-Resident.

Q.3 Who is the payee u/s 195?

All the payees are covered under this section whether they are Individual or corporates. If they have Non Residents as per section 6 then they are covered here.

Q.4 Which transactions are covered under sec.195?

Ans: As per the provisions any Interest ( except interest under section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act. Income chargeable under the head Income from Salaries is not covered under this section.

Also, payment of Dividend u/s.115-O is not covered under this section.

Further payments against imports are not covered under this section as they are out of the preview of TDS.

Q.5 What is the treatment of Salary & Dividend paid to Non-resident?

Payment of salary to Non Resident person is specifically covered under section 192 of Income Tax Act, 1961.

The dividend is not taxable income hence there is no question of deduction of TDS on Dividend arises.

Q.6 When to deduct the TDS?

TDS is to be deducted at the time of crediting the amount to the payee’s account or any other account even suspense account or at the time of payment whichever is earlier.

Q.7 What is the minimum limit for the deduction of TDS u/s 195?

Under section 195 there is not threshold limit prescribed for deduction of TDS, hence TDS has to be deducted on entire amount without limit.

Q.8. What is the rate of TDS under section.195?

Rate of TDS is as prescribed under chapter XVIIB are applicable but, in case where payee has not given his PAN no. then rate will be as prescribed under chapter XVIIB or 20% Whichever is higher will apply. However while determining the applicable rate of TDS we have to consider the provisions of DTAA with the relevant country. If payee fulfills the conditions of DTAA then rates as per DTAA will apply to him.

Q.9 What is the applicable exchange rate for TDS on non resident?

Ans: Exchange rate of Reserve Bank of India ( RBI) on the date of deduction of TDS will apply.

Q. 10 What is DTAA?

DTAA is an agreement between two countries to avoid double taxation on income which is taxable in both countries. It is also called Tax Treaty.

Q. 11 What is the procedure followed for deduction of the TDS u/s.195?

The Remitter of the payment needs to obtain the form no. 15CB from CA under section 195(6) & Rule 37BB at the time of remitting payment to Non Resident, and also needs to file the form 15CA (undertaking by remitter) online by logging in with his PAN no. After preparing online form 15CA needs to take printout and submit to his banker along with Form 15CB. For every remitance same procedure has to be followed by the remitter.

Q.12 Whether reimbursement of expenses incurred by payee are covered u/s.195?

As there is no Income element in the reimbursement of expenses incurred by the Non Resident or foreign company, therefore, no TDS is to be deducted on such reimbursement under section 195,

Q.13 What is the status of TDS deducted if after deduction the contract or work is cancelled?

If there is advance payment and later on works contract is canceled then in such case TDS deducted can be claimed from the Income-tax Department as per Circular No. 7/2007 Dated 23-10-2007.

Q.14 What are the consequences of non-complying of section 195?

Ans: If there is non-compliance of section 195 then the following consequences will attract.

  • Expenses will be disallowed under section 40(a)(i) if TDS not deducted.
  • If after deduction of TDS , not deposited then interest @1.50 % per month or part of the month will be levied from the date of deduction to the date of deposit ( Section 201(1A))
  • If after deduction TDS has not been deposited then penalty equal to the amount of TDS will attract under section 221.
  • If there is short deduction of TDS then such short deduction will attract equal amount of penalty under section 271C.

Also Read : TDS on Rent Section 194 I

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