Viewpoint | The onerous task of making payments to non-residents

Sanjeev Pandit

Generally, when an individual makes any payment to a resident of India, he is not required to deduct tax at source. Exception to this are payment towards purchase of immovable property, payment of rent exceeding the specified amount and payments that are part of business expenditure of the payer who was liable to tax audit. When payment to a resident is towards the purchase of immovable property or towards rent, the process of deduction of tax and its payment to the government is comparatively simple. The payer only requires his Permanent Account Number (PAN) and PAN of the recipient.

However, when payments are to be made to a non-resident person, the rules are onerous and the procedure quite elaborate. Even if a small amount is being paid, the payer is required to deduct tax at source if the amount is taxable in the hands of the non-resident. There is no threshold. At the outset, while making the payment to a non-resident one has to see if the amount that is being paid is in the nature of income. If it is in the nature of income or there is an element of income in that payment, one needs to verify whether it is chargeable to tax in the hands of the non-resident in India. If the amount is income and is chargeable to tax, then tax is required to be deducted and necessary forms and returns have to be filed.

In order to deduct tax at source from payment to a non-resident, the payer of the amount requires Tax Deduction Account Number (TAN). A person who is not in business may not have acquired TAN. He has to acquire it especially for this.

The next question that needs to be considered is the amount on which tax is required to be deducted. For example, if an individual is purchasing a residential apartment from a non-resident, the amount that will be paid will be the purchase price of the apartment. However, the amount taxable in the hands of the non-resident will be only the amount of capital gain computed under the Income Tax Act. Whether the tax should be deducted on the whole amount being paid or only on the income portion i.e. capital gain has been a subject matter of debate. The Central Board of Direct Taxes, following the decisions of the Supreme Court, has issued directions clarifying that while making payment to non-residents, tax should be deducted on the portion representing the income and not on the gross amount. It also clarified that what portion represents the income will depend on facts and circumstances of the case. Considering this, one may conclude that obligation to deduct tax is from the income portion of the payment.

Next, one needs to decide the rate at which the tax should be deducted while making the payment. Generally, these rates are specified in the Income Tax Act itself or in the Finance Act of the year passed by the Parliament. The most common payments which may be made to a non-resident by a resident are payment for purchase of immovable property like a residential flat and payment of rent or license fee for premises taken on lease or on licence from a non-resident. In case the non-resident seller has held the residential flat for more than 24 months, the gain on sale of such property will be long-term capital gain. In such a case, tax will be required to be deducted at the rate of 20% of the capital gain plus applicable surcharge and cess. The payer has to ensure that the capital gain on which tax is to be deducted has been correctly computed. The whole issue gets more complex if the non-resident plans to claim deduction/exemption from capital gains by investing in another residential house or by investing in specified bonds. The investment in the new residential house or bonds will be made in future but the liability to deduct tax cannot be postponed.

In case of rent or license fee, the tax is to be deducted at rate of 30 percent plus applicable surcharge and cess. This rate is specified in the Finance Act.

In other types of payments, if the non-resident does not have a PAN, it may have an impact on the rate to be applied for deduction of tax. Sometimes, the non-resident may be entitled to take benefit of agreement for avoidance of double taxation entered into between India and the country in which he is a resident. In such a case, the rate specified in the agreement may be applicable.

At times there is a doubt about the taxability of the amount that is being paid to the non-resident or the applicable tax rate or the amount on which tax should be deducted. The Income Tax Act makes provision for obtaining a certificate or order from the income tax authorities determining whether the tax is deductible at source and if so, at what rate. Either the person paying the amount may approach the income tax authorities or the non-resident recipient himself may approach the income tax authorities for such a certificate or order. In the example given above, in case of purchase of a residential apartment from a non-resident, if the non-resident proposes to claim deduction/exemption by investing in another residential house or in specified bonds, it would be a good idea to approach the income tax authorities and obtain a certificate or order for the amount of tax to be deducted at source. Although, the procedure for obtaining an order or certificate is a time-consuming process, the individual paying the amount will be able to avoid future claim from the tax authorities for failure to deduct tax at source or for short deduction of tax at source.

Once the tax is deducted at source and paid to the government within the prescribed time, at the end of the quarter the payer has to electronically file a return for the tax deducted and thereafter download certificate for tax deducted at source. This certificate is to be given to the non-resident to whom the payment was made. Once all this has been done and if the payer does not expect to have obligation to deduct tax at source from any other amount in the near future, he may surrender the TAN.

The above procedure and obligation of tax deduction is applicable if the payment is being made in India to a non-resident. If the payment is to be remitted to a non-resident in a foreign country or is to be credited to his NRE bank account, then there are additional procedures. The payer has to file certain additional forms before the remittance is made and in certain cases is required to obtain a certificate from a chartered accountant certifying the deduction of tax at source. Even if the payment made is not chargeable to tax, in some cases a form is required to be filed with the income tax department giving the details of the payments made.

While purchasing an immovable property from a non-resident, one may get a good deal but the person should also be ready to meet the obligations related to deduction of tax at source.