Deduct tax on select foreign remittances

Payment for children's education or hospitalisation won't attract TDS but payment for services will

The income-tax department is closely examining remittances made by freelancers, professionals and businesses for commercial purpose. The department is sending notices asking such taxpayers to provide details of transactions where money was transferred abroad and they did not deduct tax at source (TDS).

“Notices are being issued to taxpayers to justify payments made by them to non-residents, based on the details filled in the forms that need to be compulsorily filled when transferring money abroad. These are being issued to payees who did not deduct TDS. If the assessing officer feels that the transaction needed TDS, the payee needs to bear the entire tax applicable,” says Shailesh Kumar, director – direct taxation, Nangia & Co. The forms include Form 15CA — a declaration by taxpayer — and Form 15CB, which is a chartered accountant’s certificate.

If you receive such a notice, you will need to produce contracts, invoices and chartered accountant’s (CA) certificate and explain the nature of the transaction to the assessing officer. 

The income tax law mandates that freelancers, professionals, proprietors, companies, which need to get their books of accounts audited, to mandatorily deduct tax at source while making certain specified payments to non-residents. The transactions include payment for long-term capital gains, short-term capital gains, royalty and fees for technical services, and so on. “While most other payments specified are clear and self-explanatory, money remitted for royalty and fees for technical services has been a contentious issue between taxpayers and the tax department,” says Kumar.

Deduct tax when…

Making payments overseas for technical work like software and app development, designing or maintenance of websites, or graphic or product designs 

No withholding tax when…

Remitting money abroad for son or daughter’s education, medical treatment or for maintenance of a close relative, buying an asset, gifts

Note: The TDS provisions are applicable when books of accounts are audited

Sample this: You have an agent who gets orders for you in a foreign country. You supply directly to the customers and pay a commission to the agent. Tax experts say that such transactions do not require deduction of tax at source. For the transaction to qualify as fees for technical services (FTS), the non-resident needs to be consulting or advising you, carrying out managerial duty, sharing technical knowledge or providing technical services. But even in such cases, the income tax department has taken the view that it is an FTS transaction and the agent is acting as an advisor or carrying out managerial duties.

Tax experts say if you run a successful blog or video channel and hire services of anyone overseas, do check if you need to deduct TDS. Someone like an app developer or an individual business owner relying on a foreign agent to get orders or projects may need to deduct TDS and deposit it with the government when making international payments.

“Before making any payment abroad, consult a chartered accountant (CA) whether the transaction attracts TDS provisions,” says Amit Maheshwari, partner, Ashok Maheshwary and Associates. If the CA is of the view that the transaction does not require you to deduct TDS, take the view in writing. The views should specify the reasons why the transaction doesn’t attract TDS provisions. Preserve all papers such as contract, invoices, certificates, etc.