NMIMS - Session 4 - Withholding Taxes TDS and TCS On Sale of Goods Software Taxation
NMIMS - Session 4 - Withholding Taxes TDS and TCS On Sale of Goods Software Taxation
► Income which accrues or arises to him outside India during the year
For a resident taxpayer, global income is taxable under the Income-tax Act, 1961
Scope of total income – Non-resident taxpayer
For non-resident taxpayer, only the income accrues, receives, deemed to accrue or
deemed to received in India is taxable under the Income-tax Act, 1961
Objective of Tax Deduction at Source
Objective of Tax Deduction at Source
Emphasizes pay
as you earn
Regular inflow of
Expand nations
revenue for
tax base
Government
Collect
Curb fake and
information
bogus claims
about the
made
deductee
Overview
► A scheme of “collection and recovery of tax”
► Tentative in nature, subject to determination of final liability
► Payments to residents/ non-residents
Tax Deduction at Source - Procedure
Tax Deduction at Source - Procedure
Payment Credit
Payment refers to payment in cash or ► Book entry recording the liability.
by cheque or draft or by any other
mode ► Need not be to account of payee (eg, in case of
provision created as discussed earlier)
► Taxes are required to withheld on amount
transferred to suspense account only if relevant
section provides so specifically
Domestic withholding – overview of key withholding
provisions
Domestic withholding – overview of key withholding
provisions
Section Relevant Provision
192 Salary payments
193 Interest on Securities
194 Dividends
194A Interest other than interest on securities
194B/
194BB / Winning from lottery or crossword / horse race / Insurance commission
194D
194C Contractual payments
194H Commission or Brokerage
194I Rental Payments
194-IA Payment on transfer of certain immovable property other than
agricultural land
194-IB Payment of rent by certain individuals or Hindu Undivided Family
194 J Fees for professional or technical services
Section 192 - Tax withholding on salary
► As per section 192 of the Act, any person responsible for paying any income
chargeable under the head ‘salaries’, shall deduct income tax on the amount payable
at the average rate of tax computed on the basis of the rates in force, on the
estimated income of the taxpayer;
*For resident senior citizens (60 years and above), this limit will be INR 300,000.
#For resident very senior citizens (80 years and above), this limit will be INR 500,000.
► As per section 87A, a rebate of INR 12,500 (increased from INR 5,000 w.e.f.
01 April 2019) or the tax payable, whichever is less is available to resident individuals whose total income
does not exceed INR 500,000
► An additional surcharge of 10% leviable on amount of income tax if income exceeds INR 5 million but does
not exceed INR 10 million
► An additional surcharge of 15% leviable on amount of income tax if income exceeds INR 10 million
► Health and education cess of 4% would be levied on income tax and surcharge (if any)
Section 193 – Interest on securities
► Any person responsible for paying to a resident any income by way of interest on
securities shall at the time of payment or credit , deduct income tax at a flat rate of
10%.
► This section would not apply for certain prescribed payments (Eg: National Defense
Bonds, Specified issues of NSC, Securities of the Central and State Govt etc.)
Section 194 – Dividends
► Companies at the time of declaring the Dividends had to pay Dividend Distribution Tax (DDT) @ 20.56% at the
time of declaring the dividend. Consequently, dividends were made exempt in the hands of the shareholders.
► An Indian Company before making payment of dividend in any mode to a resident* shareholder shall deduct
income tax at the rate of 10% [the rate is effective from 01 April 2020].
► For non –resident shareholders – 20% (plus Surcharge and Cess) in case whether there is not tax treaty and
treaty rates in case of treaty (generally treaty rates are 10% / 15%)
► The provisions of this section shall not apply to payment made to LIC, General Insurance corporation if India, any
other insurer in respect of any shares owned by it
Section 194A – Interest other than “Interest on
securities”
► Any person, not being an individual or a HUF, responsible for paying to a resident any income by way of
interest, other than on securities, shall at the time of payment or credit , deduct income tax at a flat rate of
10%.
► No TDS if interest payment is less than INR 5,000. In case of payment to senior citizen, no TDS if less than
INR 50,000
► In case the person responsible for payment is an individual or HUF, tax shall be deducted at the time of
payment or credit, only if the total sales, gross receipts or turnover from business or profession carried on by
them exceeds the monetary limits specified under section 44AB during the immediately preceeding financial
year.
Winning from horse races Any person being a Any person 30% 10,000
(194BB) bookmaker or a
person to whom a
licencse has been
granted by
government for
horse racing
Insurance commission (194D) Any person Any person 5% 15,000
Section 194C – Payment to contractors
*Work includes advertising, broadcasting and telecasting (including production), carriage of goods or passengers
by any mode other than railways, catering, manufacturing or supplying a product according to the requirement
or specification of a customer by using material purchased from such customer
Section 194H – Commission or brokerage
► Explanation to Section 194H provides for an inclusive definition of the term “commission” which covers
three types of payments-
► acting on behalf of another person for services rendered (not being professional services);
► in relation to any transaction relating to any asset, valuable article or thing, not being securities.
Section 194-I – Rental payments
Are the cooling charges paid ➢ The main function of the cold storage is
to the cold storage unit Cooling to preserve the perishable goods by the
Cold storage considered as rent and liable Charges Paid
service means of a mechanical process, and
for TDS under section 194I or
whether section 194C will storage is only incidental in nature
apply?
➢ The customer is not given any right to
use any space/ equipment.
Customer
Case study – Provision of Service vs Hire Arrangements
(cont.)
Analysis:
➢ The main function of cold storage is to preserve the perishable goods by means of a mechanical
➢ The customer is not given any demarcated space or the machinery to of the cold storage and
➢ Such payment doesn’t amount to hire of the cold storage unit and 194I is not applicable;
➢ However, this arrangement is basically contractual in nature, the provision of section 194-C will
be applicable to the amounts paid as cooling charges by the customers of the cold storage
Section 194-IA / 194-IB / 194DA
► No deduction shall be made under this section where the aggregate payments during a
financial year does not exceed INR 30,000 in the case of:
► Royalty; and
In certain transactions, the payer of an income agrees to bear the income-tax liability of the payee
in such situation, the tax paid by payer on behalf of payee is also treated as income of the payee requiring
grossing up of tax. An illustration of the same is provided below:
WHT obligation arises even where any interest or other sum is credited to any account called
“Interest Payable Account” or “Suspense Account”
Scope and applicability
► Section 195 casts an obligation on a payer to withhold tax from payments to be made to non –
resident or foreign company, if such payment is chargeable to tax in India at rates in force.
► Payer can be a resident as well as a non – resident
► Unlike other provisions in Chapter XVII (TDS provisions), Section 195 uses a special phrase “any
sum chargeable under the provisions of this Act”
► Sum chargeable to tax is to be determined under Section 5 read with Section 9 of the Act
► Nature of payment to be determined from payee’s point of view
► Subject to beneficial provisions of the DTAAs with respective countries
► Sum which are not at all chargeable to tax in India (under the Act or the Treaty) shall
continue to remain outside the ambit of Section 195
► For any sum to be chargeable to tax in India, it has to be
► Received in India (Section 5 of the Act)
► Accrue or arise in India (Section 5 of the Act)
► Deemed to received accrue or arise in India (Section 9 of the Act)
Consequences of failure to deduct and pay taxes
Consequences of failure to deduct or pay tax
(Applicable to resident and non-resident)
Then, such person shall be deemed to be a taxpayer in default (Section 201 of the Act)
Once a taxpayer is deemed to be in default under section 201, interest shall be leviable under
section 201(1A) at the rate of :
1% per month or part thereof From the date on which tax was
deductible till the date of actual
deduction
1.5% per month or part thereof From the date of deduction till the
date of actual payment
Consequences of failure to deduct or pay tax
(Applicable only to resident)
Any person, including the principal officer of the company, who fails to deduct tax
shall not be deemed to be a taxpayer in default in respect of such tax if (only in the
case of resident payee):
➢ The payee has furnished his return of income under section 139;
➢ The payee has taken into account such sum for computing his total income; and
► ICo pays service fee of INR 10 mn to FCo, without WHT under Section 195(1)
TDS u/s 194Q to get precedence over TCS provisions u/s 206C(1H) by virtue of proviso to section 206C(1H) but if TDS is not
applicable, TCS will trigger (if conditions are fulfilled)
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence
► Ruling of the SC
► In case of license, the end user only gets a right to use computer software and not any of the
rights conferred on the owner of a copyright under the ICA.
► There is a difference between the ownership of a physical item in which the software is
embedded and ownership of the copyright.
► Making a copy or adaptation of a computer program in order to utilize it for the purpose for
which it was supplied, making back-up copies as a protection against loss, does not result in
infringement of copyright under the ICA. Even storage of computer program, per se, would
not result in infringement.
► The nomenclature of the agreement does not matter. What is relevant to be considered is
the real nature of the transaction, having regard to the overall terms of the agreement and
surrounding circumstances.
► What is “licensed” by the foreign, NR supplier to the distributor and resold to the resident
end user or directly supplied to the resident end user is, in fact, the sale of a physical object
which contains an embedded computer program. This is sale of goods, which does not
involve transfer of a copyright in the software.
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence
► Ruling of the SC
► Royalty definition under the ITA v. DTAA
► The DTAA contains an exhaustive definition of the term “royalty”. It includes payment made for the use
or right to use any copyright in a literary work. The royalty definition under the ITA is different and
wider as compared to the royalty definition under the DTAA. The ITA refers to consideration paid for
transfer of all or any rights, including by way of a license, in respect of any copyright.
► Since the license granted to the distributors and end users did not involve granting of any interest in
the rights of an owner of a copyright, payment made for such license does not qualify as royalty both
under the ITA provisions, as subsisted till 2012, as well as the DTAA.
► The ITA was amended in 2012 to provide that transfer of all or any rights includes transfer of all or any
rights for use of a computer software. This amendment expands the royalty definition and may not be
considered as clarificatory in nature. However, such payments would not qualify as royalty for the
purposes of the DTAA.
► Relevance to OECD commentary
► No retrospective amendment obligation to withhold taxes.
► Treaty benefits to be considered for withholding under section 195
Questions
Thank You!!