Section 195 of the Income Tax Act, is a crucial provision that deals with the taxation of payments made to non-residents. It requires individuals and businesses in India to deduct (TDS) when making payments to non-residents for certain types of income.
What is Section 195?
ection 195 mandates that if a person or entity in India makes a payment to a non-resident, they must deduct tax before making the payment. The types of payments covered under this section include interest, royalties, technical fees, and other sums. The idea is to ensure that non-residents pay tax on the income they earn from India, even though they might not be physically present in the country.
Key Points of Section 195:
- Applicability: Section 195 applies to payments made to non-residents, including foreign companies. It covers various types of payments such as interest, royalties, technical fees, dividends, and other income.
- Deduction of Tax: Before making the payment, the payer must deduct tax at the applicable rate under this section. The rate depends on the nature of the income and the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the non-resident’s country.
- Rates of TDS: The TDS rate under Section 195 is not fixed; it varies based on the type of income and the relevant DTAA. For example, interest payments may attract different rates compared to royalties or fees for technical services.
- Filing and Compliance: After deducting the tax, the payer must deposit it with the government and file the necessary forms. They must also issue a TDS certificate to the non-resident to confirm the tax deducted and deposited.
Example:
Let’s consider an Indian company, XYZ Ltd., which is making a payment of $10,000 to a US-based consultancy firm for providing technical services. According to the DTAA between India and the USA, the tax rate on technical services is 10%.
- Calculate TDS: XYZ Ltd. needs to deduct 10% of $10,000, which equals $1,000, as TDS.
- Payment and Compliance: XYZ Ltd. will pay the consultancy firm $10,000 – $1,000 = $9,000. The $1,000 deducted as TDS must be deposited with the Indian government. XYZ Ltd. also needs to file the TDS return and provide a TDS certificate to the consultancy firm.
- Benefits: The consultancy firm can claim the $1,000 deducted as a credit against its tax liability in the US. This helps in avoiding double taxation, thanks to the DTAA.
Conclusion:
In summary, Section 195 ensures that income earned by non-residents in India is taxed appropriately, thereby maintaining the country’s tax compliance and preventing potential tax evasion. For anyone dealing with cross-border transactions, understanding and adhering to this section is essential to ensure smooth operations and legal compliance.
– Ketaki Dandekar (Team Arthology)
Read more about Section 195 here – https://cleartax.in/s/195