Section 195 | TDS on Professional fees to Non-resident

Overview

In India, the taxation of professional and technical fees paid to non-residents (NRIs) is governed by Section 195 of the Income Tax Act, 1961. This section mandates that Tax Deducted at Source (TDS) is required to be deducted on payments made to non-residents for services rendered in India, including professional and technical services.

What are professional and technical fees?

Professional fees: These refer to fees paid for services rendered by professionals like lawyers, doctors, architects, accountants, etc.

Technical fees: These are payments made for services of a technical nature, such as engineering, scientific, or consultancy services.

TDS applicability u/s 195

Any person (Resident or Non-Resident of India) who is liable to pay any sum [except salaries (TDS to be deducted u/s 192), interest payable u/s 194LB, 194LC & 194LD] to Non-Resident Indians (NRI) are required to deduct TDS u/s 195, TDS on Professional and Technical fees to Non-resident.

• Deductor (payer): Any Resident or Non-resident Indian
• Deductee (payee): Non-resident Indians or Foreign companies
• Threshold Limit: There is no threshold limit to deduct TDS u/s 195, TDS on professional and technical fees to NRIs. If the income of non-residents Indians taxable in India TDS has to be deducted.

TDS rate on Professional and technical fees paid to Non resident

The applicable TDS rate under Section 195 depends on whether the payment made to the non-resident is considered income in India and if any Double Taxation Avoidance Agreement (DTAA) exists between India and the non-resident's home country.

Standard TDS Rate: The default TDS rate for professional and technical fees paid to non-residents is 20% (plus applicable surcharge and cess). However, this rate can vary based on the provisions of the DTAA.

DTAA Benefits: If a DTAA exists between India and the non-resident's country of residence, the TDS rate may be reduced as per the treaty's provisions. In such cases, the non-resident must provide a Tax Residency Certificate (TRC) to avail of the reduced rate.

When to deduct and deposit TDS u/s 195?

The time for deduction and deposition of TDS u/s 195, TDS on professional and technical fees to NRIs is given below:-

Time for TDS deduction:

The TDS u/s 195, TDS on professional and technical fees to NRIs is deducted at the time of:-

• Credit of professional fees in the books of accounts of the payer, or
• At the time of payment of professional fees to NRI, whichever is earlier.

Time for TDS deposition:

• TDS deducted by the buyer should be deposited with the central government using challan for TDS payment on or before 7th of the following month in which TDS is deducted.
• TDS can be deposited online using the TRACES platform.

Filing and Compliance Requirements

Form 15CA/15CB: Before making the payment to the non-resident, the payer must file Form 15CA and Form 15CB with the Income Tax Department to report the payment and ensure compliance.

• Form 15CA: A declaration by the payer.
• Form 15CB: A certificate issued by a Chartered Accountant confirming that the correct TDS has been deducted.

The payer must also deposit the TDS with the government and issue Form 16A to the non-resident as a proof of TDS deduction.

Application for Nil or Lower Deduction Certificate by NRIs

Where the Non-resident Indian seller believes that no amount or only a partial amount (other than salary) is taxable in India and he believes that TDS is to be done at a Lower/Nil rate he may make an appeal to Assessing officer (AO) under Form 13 for obtaining a Lower deduction/ Nil deduction certificate under section 197. Now, AO will enable the deductor or payer to deduct the TDS at a much lower rate.

Penalties for Non-compliance with section 195

Following are the consequences of non-compliance with section 195, TDS on professional fees to NRIs:-

• Disallowance: If TDS is not deducted or TDS is deducted but not deposited for a given period of time such an expenditure will be disallowed in case of a business u/s 40(a)(i), and will be allowed in the year of payment.
• TDS is not deducted: If a deductor has not deducted the TDS from the payment of fees for any technical or professional services from NRIs, it charges interest of @1% per month till the date TDS is deducted.
• TDS is deducted but not deposited: If a deductor has deducted the TDS from the payment of fees for any technical or professional services from NRIs but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.
• Penalty u/s 271C: If TDS is deducted but not paid to the government a penalty equivalent to the amount of TDS will be imposed u/s 271C of the Income Tax Act.
• Short Tax Deduction: In a case of TDS is deducted less than what is required to be deducted, a penalty equal to the difference between the actual amount deductible and actually deducted would be levied.

Why choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 195 plays a key role in regulating the tax compliance for payments made to non-residents for professional and technical services. It ensures that taxes are deducted at source and remitted to the government, providing a transparent mechanism for taxing income earned by non-residents in India. Understanding the applicable TDS rates, exemptions, and filing requirements is essential for businesses or individuals making such payments to avoid legal complications.

Frequently Asked Questions (FAQs)