Section 195 of the Income Tax Act, 1961 – An Overview

Section 195 of the Income Tax Act, 1961 is a key provision that mandates the deduction of tax at source for any payment made to a non-resident which is chargeable to tax under the Act. The responsibility lies with the person making the payment (payer) to ensure that the appropriate TDS is deducted before making the payment or at the time of crediting the amount to the account of the non-resident, whichever is earlier.

This section applies irrespective of whether the payment is made to a non-resident individual, foreign company, or any other non-resident entity. The scope of Section 195 is wide and encompasses various types of payments, including:

• Fees for technical services
• Professional or consultancy fees
• Royalties
• Interest
• Commission or brokerage
• Any other sum chargeable to tax

Obligation of the Payer and Payee

• The payer is responsible for deducting the applicable withholding tax at the time of making or crediting the payment.
• The payee (non-resident recipient) is expected to receive the payment net of tax and rely on the certificate issued by the payer for the deducted amount.
• It is the payer's responsibility to deposit the deducted tax with the Indian government within the prescribed timeline and file the necessary returns and certificates.
• Failure to deduct or deposit TDS correctly can attract interest, penalties, and disallowance of expenditure under various provisions of the Income Tax Act.

Determining the Rate of TDS

The rate at which withholding tax must be deducted is determined based on:

• Rates prescribed under the Income Tax Act, 1961, or
• Rates specified in the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the non-resident payee.

If there is a DTAA in force, the taxpayer can opt for the rate that is more beneficial to the non-resident. However, to avail the benefit of a lower rate under DTAA, the non-resident must provide certain documentation, such as:

• Tax Residency Certificate (TRC) from the government of their country of residence
• Self-declaration under Form 10F
• PAN (Permanent Account Number) in India (in many cases)

Distinction Between TDS and Withholding Tax

While often used interchangeably, Tax Deducted at Source (TDS) and Withholding Tax differ slightly in context:

• TDS refers generally to tax deducted from payments made to residents and non-residents in India under various sections of the Act.
• Withholding Tax is a term more commonly used in the context of international payments. It refers to the tax deducted by the Indian entity before remitting the payment abroad to a non-resident.

In essence, both concepts refer to the tax deducted before the actual payment is made, ensuring that the government receives its dues in advance.

Compliance Requirements – Form 15CA and Form 15CB

To streamline foreign remittances and ensure tax compliance, the Income Tax Department requires the submission of Form 15CA and Form 15CB as per Rule 37BB of the Income Tax Rules.

Form 15CA – Declaration of Remitter

• Form 15CA is an online declaration by the remitter (person making the payment).
• It provides information about the nature and amount of the remittance and whether the same is taxable under Indian law.
• It acts as a tool for the Income Tax Department to collect information about foreign remittances and track tax compliance.
• It is mandatory for most payments except those specified in the exempted list provided in Rule 37BB.

Form 15CB – Certificate from Chartered Accountant

• This form is a certificate issued by a Chartered Accountant (CA).
• The CA certifies that he/she has examined the remittance, the relevant agreement, and has considered the provisions of Section 5 and 9 of the Income Tax Act, as well as applicable DTAA provisions.
• The certificate includes details about the nature of payment, applicable tax rate, amount of tax deducted, and confirmation that the transaction is in accordance with Indian tax laws.
• The remitter must obtain Form 15CB before filing Form 15CA, except in cases where Form 15CB is not required (as per prescribed thresholds and exemptions).

Our Services at Maksim Consultants

At Maksim Consultants, we specialize in providing end-to-end support and consultancy for foreign remittances and compliance under Section 195 of the Income Tax Act. Our experienced team of tax professionals and Chartered Accountants ensures that your cross-border transactions are structured in a tax-efficient and legally compliant manner.

Our Key Services Include:

• Professional Opinion on Withholding Tax
  We provide detailed professional opinions on the applicability and calculation of withholding tax on foreign remittances. Our analysis covers both the Indian Income Tax Act and the relevant DTAA provisions with the country of the non-resident recipient. We assess the exact nature of the transaction, determine whether it is chargeable to tax, and advise on the applicable TDS rates and compliance procedures.
• Certification for Form 15CB
  Our expert Chartered Accountants examine all relevant documentation and issue Form 15CB certifications as required. We ensure the remittance is examined under applicable tax laws and advise on any exemptions or reliefs available under DTAA.
• Preparation and Filing of Form 15CA
  We handle the complete preparation and online filing of Form 15CA with the Income Tax Department. Our team ensures timely and error-free submission, enabling smooth and compliant foreign remittance.
• Complete Regulatory Compliance Support
  From document verification and coordination with banks to filing forms and maintaining audit trails, we offer comprehensive compliance support for all your international remittance needs.

Why Choose Maksim Consultants?

• Expertise in Indian and International Tax Laws
• Deep Understanding of DTAA and Cross-Border Taxation
• Seamless Documentation and Process Handling
• Fast Turnaround Time for Certification and Filing
• Trusted Advisors with a Client-Centric Approach