A very important part of the Income Tax Act of 1961 is Section 195, which says how payments made to non-residents, like foreign companies, should be taxed. This part says that tax at source (TDS) must be taken out of some payments made to people who don't live in the country. It ensures that the Indian government gets taxed on non-residents' income from sources in India. As it affects how tax is deducted and remitted to the government, understanding the provisions of Section 195 is crucial for both tax payers and businesses that make such payments.
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What is Section 195 of Income Tax Act?
Section 195 deals with the deduction of income tax at source (TDS) on payments made to non-residents. These payments could be for interest, royalties, fees for technical services and other types of income. In accordance with Indian tax laws the main goal is to ensure that taxes are paid on income earned by non-residents.
Section 195(1)- Other Sums
1. Who is liable to deduct tax?
Any person making a payment to a non-resident is responsible for deducting tax at the source. This applies to individuals, companies or any other entity making such payments.
2. What payments are covered under Section 195 of Income Tax Act?
Section 195 applies to all sums payable to non-residents that are chargeable under the Income Tax Act. These could include
Interest: Payments on loans, deposits, or other borrowings.
Royalties: Income from the use of patents, copyrights or other intellectual property.
Fees for technical services: Payments for services such as consultancy or management services.
Other sums: Any other income chargeable under the provisions of the Act, excluding salaries.
3. When is the tax to be deducted?
The tax must be deducted at the time of
Credit: When the income is credited to the non-resident's account, whether it’s called an "Interest Payable Account" or any other name in the books of the payer.
Payment: When the payment is made to the non-resident, whether in cash, by cheque, by draft, or by any other mode.
The payer must deduct tax at the rates in force at the time of payment or credit, whichever is earlier.
Special Provisions
Government and Public Sector Banks: For interest payments made by the Government or public sector banks tax is deducted only when the payment is made, not at the time of credit.
Dividends: No TDS is deducted on dividends paid under Section 115-O.
Section 195(2) - Application for Determining Taxable Portion
If a payment to a non-resident includes both taxable and non-taxable parts, the payer can ask the Assessing Officer to figure out which parts are taxable. Only the income that is taxable will have the tax deducted from it.
For instance, a non-resident might earn income that includes exempt income under a tax treaty. The payer can seek guidance from the Assessing Officer to ensure tax is deducted only on the portion that is taxable.
Section 195(3) - Application for Non-Deduction of Tax
A non-resident entitled to receive income subject to TDS under Section 195 can apply for a certificate of non-deduction of tax from the Assessing Officer. If the certificate is granted, the payer will make the payment without deducting tax, and the payee can directly claim the tax liability, if any, at the time of filing their return.
This provision is particularly useful when the recipient believes that no tax is due on the payment or the tax liability is lower than the TDS rate.
Section 195(4) - Validity of the Certificate
Once issued, a certificate under Section 195(3) remains valid until the expiration date specified in the certificate, or until it is canceled by the Assessing Officer. The payer must continue to make payments without TDS as long as the certificate is valid.
Section 195(5) - Power of the Board to Make Rules
Under Section 195 the Central Board of Direct Taxes (CBDT) has the authority to create rules that regulate the application for non-deduction certificates and establish the procedures for TDS. These rules ensure that the tax deduction process is easy and quick for both the payers and the payees.
Section 195(6) - Reporting Requirements
As required by Section 195 the payer must also give specific information about the payments made to non-residents. To the tax authorities this data must be submitted in the format required. The reporting helps the authorities keep track of non-residents' tax liability and ensures transparency in the tax deduction process.
Practical Examples of Section 195 of Income Tax Act
Practical examples from Section 195 show how tax is deducted at source on payments to non-residents. These examples include interest payments, royalties, and technical services, among others.
Example 1- Payment of Interest to a Non-Resident
Let's say that a business in India pays interest to a lender in another country. Section 195 says that the business has to take out the tax on the interest payment at the right rate. Depending on when the credit is made or when the payment is made, the company must deduct tax. The payer must ensure that the correct tax rate is used if the interest payment is covered by a Double Taxation Avoidance Agreement (DTAA).
Example 2- Payment for Technical Services
An Indian company hires a technical consultant from the US to provide technical services. The Indian company is required to deduct TDS on the fees paid for these services but the consultant can give the Indian company a certificate of non-deduction, so the Indian company can pay the consultant without taking TDS.
Significance of Section 195 of the Income Tax Act
Tax at source (TDS) deductions on payments made to non-residents are required by Section 195 of the Income Tax Act. It covers many types of income, like interest, royalties, and fees for technical services. The person who is paying must take out the tax at the correct rates. People who don't live in India but make money there will have to pay taxes on their income. Along with applications for figuring out the taxable part or non-deduction of tax this section makes sure that taxes are collected fairly.
Summary
For the proper collection of taxes from non-residents earning income in India, Section 195 of the Income Tax Act, 1961, is a crucial provision. Residents must deduct tax at the source from payments made to non-residents, such as royalties, interest and technical services fees. Not only does this system help the government collect taxes but it also ensures India's international tax obligations are met.
To ensure that they comply with their obligations taxpaying individuals and businesses must comprehend the details of this provision. The application for tax deduction or exemption gives both the payer and the payee a way to ensure that the right amount of tax is deducted or not deducted, depending on the details of the transaction. Provisions like Section 195 continue to be crucial in effectively managing cross-border tax compliance as India engages in more international trade and business.
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FAQs on Section 195 of Income Tax Act
Q1. What is Section 195 of Income Tax Act?
Payments made to non-residents for income tax-chargeable items like interest, royalties, and technical fees must be subject to the deduction of tax at the source (TDS) under Section 195.
Q2. When should TDS be deducted under Section 195?
When money is credited to the payee's account or when payment is made, whichever comes first, TDS should be deducted.
Q3. Can a non-resident apply for non-deduction of tax under Section 195?
A non-resident can ask the Assessing Officer for a certificate that lets the payer make the payment without taking out TDS.
Q4. How is the taxable portion of a payment determined?
If the payment has both taxable and non-taxable parts, the payer can ask the Assessing Officer to find the taxable part so that tax can be deducted from that portion.
Q5. What happens if the certificate for non-deduction of tax is granted?
The payer must make payments without taking out tax as long as the certificate is valid if it is granted.
