Are you availing the benefit of Lower Tax/ No Tax Deduction Certificate?

Tax Deducted at Source (“TDS”) is a tax collected in advance from the very source of Income. Any person who is liable to make payment of specified nature such as salaries, professional fees, fees for technical service, royalty, commissions, interest on investments, rent, sale of immovable property, etc.

Are you availing the benefit of Lower Tax/ No Tax Deduction Certificate?

Tax Deducted at Source (“TDS”) is a tax collected in advance from the very source of Income. Any person who is liable to make payment of specified nature such as salaries, professional fees, fees for technical service, royalty, commissions, interest on investments, rent, sale of immovable property, etc. to any other person shall deduct tax at source and remit the same into the account of the Central Government.

A specified person or company that is making the payment is accountable for deducting the tax and depositing it with the government is therefore known as the  Deductor whereas the person or company receiving the net payment is called the Deductee. Generally, the TDS rate varies from 1% to 40%.

The deductee being an Indian resident would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor subject to the Income tax law . However, in the case of a non-resident. the non-resident deductee will be entitled to the credit of TDS as per the domestic law of their country.

In cases where the tax payer contemplates that his tax liability for the year will be NIL or less than the TDS rate applicable on a particular source of income, the Income Tax law in India permits the deductee to apply for a lower rate of TDS or no TDS. This provision abets the deductee to manage cash flows at the very inception since the deductor will deduct tax at a lower rate or no tax is deducted (as the case may be) and remit the payment accordingly to the deductee in such a case.

However, it has been observed that there are various specified cases wherein the deductee fails to apply for Lower tax/ No tax deduction certificate resulting in higher tax deduction from their income (though later refund of the same is available while filing Income tax return in India).

Case 1:- Taxpayers unaware of the option to avail lower/ no tax deduction certificate in their case

The most common cases in the industry can be seen wherein foreign companies are providing specified services in India which are subject to deduction of TDS. Due to single/ few transactions during a year, such foreign companies are unaware of the option to avail lower/ no tax deduction in their case.

For instance Foreign Company (FC)/ non-resident (NR) say “X” provide specified services in India to say “Y”:-

Situation 1:- Where X has Permanent Establishment (PE) is in India:- In such a case, Y normally deducts TDS at a higher rate @ 40% on gross receipts of Y. However, the actual tax of X may be less than 40% wherein tax is computed after deduction of eligible expenses. In such case, X is eligible to opt for obtaining low TDS certificate and justify lower rate of tax to Y.

Situation 2:- Where X does not have PE is in India:- The moot question in such a case is  whether TDS is applicable or not. There are cases wherein a treaty with foreign countries provides certain specified services and hence are not eligible for deduction of TDS. However, said services are taxable as per Income tax law in India. In such cases, Y usually imposes and deducts TDS as per the Income tax law in India in order to avoid future risk of non compliance of the same by the IT Department on him. In such cases, X is eligible to opt for obtaining a No TDS certificate and justify non eligibility of TDS on the said service.

Thus foreign companies should contemplate rate of taxes in India on the particular transaction and obtain lower tax/ no tax deduction certificate to avoid any future dispute.

Case 2:- Incorrect / Dispute in classification of service between deductor and deductee

Rate of TDS differs depending upon the nature of specified service. For instance

  • Recently in Budget 2020, rate of TDS on fees for technical services (other than professional services) has been reduced to 2% from existing 10%. However, professional services are still subject to 10% TDS. Now, an issue may arise as to whether Engineering services fall under the head of Technical service subject to 2% TDS or Professional service subject to 10% TDS.
  • As also discussed under Case 1 hereinabove, treaty with the country may also mention specified service under particular category of service which may differ from the category of service as mentioned under Income tax law in India.

In such cases,  deliberation on nature of service is vital and it is consistently advised that the deductee  apply for lower or No TDS certificate (as the case may be) from the Income Tax Department to avoid conflict of opinion with deductor.

Case 3:- Change in law resulting in applicability of tax on particular transaction

Recently, in Budget 2020, Dividend Distribution Tax (DDT) has been abolished. DDT is the tax paid by domestic companies in respect of the dividends declared, paid or distributed to shareholders or income paid by mutual funds to unit holders @ 15% plus cesses. However, DDT was not levied on dividend/ income paid to non-residents.

Now, due to eradication of DDT, such dividend/ income would be taxable at  the hands of shareholders or unit holders both resident as well as non-resident as per applicable tax rates. Consequently, domestic companies are require to deduct TDS while remitting the dividend/ income to residents as well as non-resident shareholders.

Thus, non-resident shareholders are advised to obtain no TDS or Lower TDS certificate in case their total income in India is below the taxable limit as per slab rates under Income Tax Act. Accordingly, the domestic companies will remit the dividend/ income to them without deducting TDS/ lower deduction of TDS.

Case 4:- Income arising out of Long term capital gain on sale of property

One of the specified service on which the deductor is required to deduct TDS is on the sale of immovable property subject to the conditions. There are cases where the property is sold by individuals and capital gain (Long Term Capital Gain or Short Term Capital Gain) is computed as NIL as per income tax law in India resulting in no tax. In such cases, usually, the individuals do not apply for no tax deduction certificate resulting in deduction of TDS on sales value by such a deductor.

In such cases it is consistently advised to contemplate the transactions and tax implications therein at the inception and accordingly apply for No tax/ Lower tax deduction certificate.

The deductee can apply to the Assessing Officer (AO) for a  certificate of withholding tax at a lower rate in terms of  Rule 28AA of the Income-tax Rules, 1962.

Procedural requirements for applying No Tax/ Lower Tax deduction Certificate

 

S. No. Procedural requirement Details
1. Application Form An application for nil/lower deduction of TDS using the FORM 13 is required to be filed under Section 197 of the Income Tax Act.
2. Whom to file Assessing Officer (TDS)
3. How to file Form 13 can be filed either online or manually. Regions of Mumbai, Tamil Nadu and Karnataka have enabled online filing of Form 13 for faster processing of applications.
4. Information/ Documents to be submitted Estimated Income Computation for which F.Y for which certificate is sought, Computation of estimated total income of any of the four previous year preceding to the previous year for which return of income has not been filed, any other relevant documents. It is suggested that the tax payers file complete and correct details required for processing the application in the first instance.
5. Timeline for making application Income-tax provision does not provide any due date to make the application. However, as TDS is made on income of on-going financial year, it is advisable to make an application at the beginning of financial year in case of regular income throughout the financial year and as and when the need arises in case of one-off incomes.
6. Issue of Certificate If the application satisfies the AO, he would process the issue of the certificate. The copy of this certificate can be attached to the invoice given to the deductor, and he can use this to justify the lower tax deduction.
7. Validity of application The Certificate is issued for a particular financial year and stands valid from the date of issue and throughout the financial year unless cancelled by the assessing officer (TDS) before the expiry.