Does my company make foreign remittances/payments? What are the important documents for me to be aware of?
- When is it required to withhold tax on foreign remittance? The sum payable to a non resident or a foreign company is income in the hands of the non resident / foreign company. If this income is chargeable to tax in India under the provisions of Income Tax Act, then tax is required to be withheld on it. On the contrary, if the payment is not taxable in India then there is no need to withhold tax.
- How would one come to know that the remittance is chargeable to tax or not? For a layman, it is not easy to ascertain whether the income is chargeable to tax or not. Chargeability can be ascertained and certified by obtaining certificate in form 15CB from a chartered accountant for each remittance which is made (even if the payment is repetitive in nature). The chartered accountant examines the nature of expenditure, chargeability provisions under the income tax act, double tax avoidance agreements, other required documents and provides in the certificate whether tax needs to be withheld or not and if yes then how much. Form 15CB is filed online through the income tax account of the assessee.
- Threshold? There is no threshold limit for tax withholding on foreign payments. Every single payment needs to be analysed for tax withholding, be it any amount, and if it is liable to tax then tax needs to be withheld.
- What is 15CA? 15CA is a declaration about taxability by the remitter which the remitter completes on the basis of the 15CB issued by the chartered accountant. It is required by banks before making the remittance.
Both form 15CA and 15CB are a source of collecting information in respect of payments which are chargeable to tax in the hands of the recipient non resident. This is starting of an effective Information Processing System which is being utilized by the Income tax Department to independently track the foreign remittances and their nature to determine tax liability.
- What is the rate? Rate of withholding is either the rate prescribed by the Indian Income Tax Act (Act) or the rate prescribed by the double tax avoidance agreement (DTAA), whichever is beneficial to the assessee/ payer subject to the Permanent account number provision laid down below.
- Exchange rate for Tax withholding? The rate of exchange to be used for converting the tax withheld into Indian currency is the SBI tt buying rate as on the date when TDS is required to be withheld.
- When should the tax be withheld? The tax needs to be withheld at the time of credit of such income to the account of the payee or at the time of payment thereof whichever is earlier.
- Documents Involved? Below are the documents involved in the above certification process of any foreign payment:
- Tax Residency certificate (TRC)? To take the benefit of the DTAA rate, the payer must obtain a TRC from the non resident recipient who in turn will obtain it from its Government (where he is resident). TRC is the certificate duly verified and issued by the Government of the country of which the non resident claims to be a resident for the purpose of tax. Without the TRC, the beneficial rate cannot be applied and hence if the arrangement between the payer and the recipient is such that the payer needs to bear the tax then a higher tax burden is to be borne by the payer. TRC is a proof of residency in a particular country.
It was noticed that in many instances the taxpayers who are not tax resident of a contracting country do claim benefit under the DTAA entered into by the Government with that country. Thereby, even third party residents claimed unintended treaty benefits. Taking the above mentioned certificate will suffice a check on this. The format and particulars of TRC issued by different Governments is not the same.
The procurement of TRC from Government takes time and hence it is advisable that where the company has to make repetitive remittances to a non resident/ foreign company, the TRC requirement should be flagged up to the non resident/ foreign company beforehand. This gives time to the foreign company to procure the same from its Government. Also, in such cases, it is convenient to take the TRC which is valid for the entire year and not invoice wise.
- PAN? The non resident to whom remittance is due must possess Permanent Account Number (PAN) so that the payer can avail lower tax rate benefit of DTAA or the rate prescribed for the foreign payment under the Act. If PAN is not available then Indian Income Tax Act states that tax should be withheld straight at 20% (or if the rate determined without this provision is higher then such higher rate). Hence if the DTAA rate is 10%, Act rate is 15% and the payee does not have a PAN, the tax withholding rate would be 20% (higher rate). However, this provision is now relaxed and if the non resident is able to furnish the tax residency certificate then the beneficial rate can be applied and the 20% higher rate tax deduction can be avoided.
- No Permanent Establishment (PE) Declaration? The non resident recipient needs to provide a no PE declaration. This declaration states that the recipient does not have any permanent establishment/business connection in India. The declaration is required to be taken to decide upon the tax rate. If the recipient has business connection in India then a different approach needs to be taken to determine the taxability.
- Form 10F? This is an internal document to be provided by the non resident recipient. The format of the form is prescribed under the Indian Income Tax Act. It asks for basic information about the non resident. This is mandatory where the treaty benefit is availed.
- Due date for depositing the tax withheld? The due date for depositing the tax withheld with the Government is on or before seventh of the next month in which the tax is deducted.
- Consequence of non compliance?
- Disallowance of particular expense if TDS not deducted at all.
- Interest implications if TDS is deducted but deposited late and penalty equal to TDS if TDS not deposited.
- Penalty implications.