Withholding Tax U/S 195 of Income Tax Act – Practical Approach
Section-195 of the Income Tax Act (ITA) is one of the important ‘compliance gate’ for tax collection from Non-resident. As this Section provides tax to withhold on any payments to non-residents if such payment is chargeable to tax unlike other TDS provisions under ITA. Therefore, this section is a code in itself for tax impacts on payment to non-residents. Here is some QnAs based on withholding tax u/s 195 of Income Tax Act-Practical Approach.
Abbreviations Used:
BEPS : Base Erosion Profit Shifting
DTAAs : Double tax Avoidance Agreements
ITA : Indian Income Tax Act
MLI : Multilateral Instruments
NR : Non-Resident
PPT : Principal Purpose Test
TDS : Tax Deducted at Source
TRC : Tax Residency Certificate
WHT : Withholding Tax
Q-1: With Holding Tax Obligation U/S 195 Is Applicable, Whether Or Not, Sum Payable Is Chargeable To Tax Under The Provisions Of ITA?
A: The Apex court in GE India Technology case laid down the following principles:
- With Holding Tax (WHT) obligation arises not only for pure Income but also for composite payment with an embedded income elements, the same being chargeable to tax;
- Obligation to WHT is however, limited to appropriate proportion of income chargeable to tax as per ITA;
- A payer is to approach the tax authorities for determining WHT liability ONLY in case of doubt on chargeability of tax on such income;
- ITA is to be referred as one single, integral, inseparable code not in isolation;
- A provision cannot be wrongly interpreted by omitting certain words in tax provision.
Q-2: What Are The Key Differences In With Holding Tax (WHT) U/S 195 And Other TDS Provision?
A: The key differences in With Holding Tax (WHT) u/s 195 and other TDS provision:
- No exemption to personal payment e.g. payment to foreign architect for residential house by individuals;
- No threshold, even Rs. 1 payment is covered;
- Use of special phrase “chargeable to tax under the Act.”
- Applicable to all payers irrespective of residential status, the constitution of the payee etc.
- Applicable even payer is NR. [Explanation 2 of S-195(1) of ITA] Practically, possible only when NR is having tax presence in India as Agent, Nominee, branch or PE.
- Payer shall be deemed as ‘representative assesse’ of NR i.e. any tax due from the Transactions by the payer shall be recovered from him as assesse. [S-163]
- Chargeability to tax to be determined after considering tax treaty if available with the payee’s/beneficial owner’s Country.[S-195 read with S-2(37A) (iii) & S-90(2) and CBDT Circular No. 728 dt. 30.10.1995]
- Tax can be deducted on the income elements of the payment even without referring to S-195(2) of ITA.
- Surcharge is applicable as per ITA.
- Grossing up required if tax borne by payer e.g. payment to NR is Rs. 100 and WHT rate is 10%. Gross amount for WHT would be Rs. 111.11(100*100/90). However, grossing up may not be required if tax is recovered from payer in the absence of WHT.
- Chartered accountants certificate is Mandatory in Form 15 CB, if WHT is required to be deducted.
- Tax Residency Certificate (TRC) is Mandatory for the benefit of tax treaty.[S-90(4) of ITA].
- If TRC is not providing full details, then Form 10F to be provided by payer.
- Section-206AA of ITA is not applicable if specific information is provided by the payer.
- Online upload of all details of payments made to Non-Residents in Form 15 CA and Form 15 CB.
Q-3: How Residential Status Of Payee Is Determined, When Year Is Far From Over?
A: Only guidance will be status of payee at the time of payment keeping in view of his past records and reliable future planning.
Q-4: Whether NR Payer Is Under WHT Obligation U/S 195 Of ITA? I.e. Payment Made By One NR To Another NR Outside India ?
A: Yes, It is applicable if income is chargeable to tax under Income Tax Act. (The Apex court in Vodafone case 2012)
Q-5: Whether WHT Is Required If Payer Only Reimbursing Cost To The NR Payee?
A: Reimbursements without any profit elements is not chargeable to tax due to absence of Income element to payee. Other very strong view is that one need to test the nature of reimbursement on touch stone of its chargeability to tax as per ITA if it would have been paid directly to the service provider accordingly take decision. There are conflicting decision on this issue, one need to take most considered decision on this.
Q-6: What Are The Consequences Of Failure To With Holding Tax U/S 195 Of Income Tax Act On Payer Or Chartered Accountants?
A: Any failure to WHT on any payments to NR is that of the payer in all circumstances. He cannot take shelter of chartered accountants certificate to discharge his failure. The only way to discharge the failure of the payer to pay tax along with interest and penalties and face prosecution wherever applicable. Now a days with the advent of online furnishing of information, it is very unlikely to cover the failure within dust of papers. Therefore, payer should take all efforts to ensure compliance.
Q-7: How To Ensure Compliance Of S-195 Of Income Tax Act Without Fail?
A: Very important points to be kept in mind:
- Nobody else is responsible other than the payer for any failure to WHT otherwise he has to pay tax, interest and penalties as representative assesse of the Non-resident.
- Take almost care to determine the exact nature of payment as it is the important factor to know the chargeability of any payment to Non-residents.
- There are certain payment which are deemed as Income of Non-residents even without residence, place of business or permanent establishment of Non-residents in India. E.g. dividend, interest, Royalty, fee for technical services. Unlike business income or capital gain which requires nexus like PE or assets location.
- Determination of chargeability and tax of any payment requires expert knowledge of Income tax Act, tax treaties (DTAAs) which India is having with 97 Countries and thousands of case laws interpreting tax laws and tax treaties.
- Recently almost all the tax Treaties has undergone a complete change after implantation of BEPS action Plan 15 through Multilateral instructions (MLI), one need to take care of such change.
- MLI also provides for Principal Purpose Test (PPT) while extending treaty benefit which is very difficult know at the time of WHT. In this situation, the payer should take reasonable undertaking and indemnification from payee for provable vicarious liability of payer u/s 163 of ITA.
- Tax treaties are also subject to change through Most Favoured Nation (MFN) clause and protocols, this change requires special attention.
- Whenever there is a confusion, payer need to follow conservative approach and may go to tax authorities for determination of tax on such Transaction or let the NR payee to take Advance ruling on the disputed matter.
To conclude, tax authorities are fully assured that they will collect tax on all taxable transactions which the payer is doing the non-resident payee either through the payer or from the payer especially in cases when such NR is not having residence, place of business or permanent establishments in India. At least to mitigate the risk of penalties, the payer should ensure full documentation, information in the shape of relevant tax provision, treaty provision and case laws in support of his decision on withholding tax. We have discussed in great details withholding tax u/s 195 of Income Tax Act-Practical Approach.
(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)
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