Most individuals are under the impression that the requirement to deduct tax at source (TDS) applies only to businesses or professions, that their only connection with the subject of TDS is when tax is deducted at source from salaries or interest that they receive, and that they have to only ensure that they claim credit for such TDS when they file their returns of income. That is, however, not true.
An individual is also required to deduct TDS at times and undergo the whole rigmarole of obtaining a TAN (tax deduction account number), deducting and paying TDS on time, filing a quarterly TDS return and issuing a TDS certificate to the person from whom TDS has been deducted. When is this required?
The requirement to deduct TDS, of course, applies to individuals carrying on business or profession if the turnover or gross receipts of the business or profession exceeded the limits applicable for tax audit in the earlier year. These limits were Rs 60 lakh for businesses, and Rs 15 lakh for professions in the fiscal 2010-11. Therefore, if you are carrying on a business or profession and were liable to get get a tax audit done for the year ended 31 March 2011, you are required to deduct TDS from all applicable payments, such as interest, rent, professional fees and payment to contractors.
Illustrations by Shyamal Banerjee/Mint
However, even if you are not carrying on any business or profession, but are, say, a salaried employee, you are liable to deduct TDS from payment of all types of income paid to non-residents. This requirement applies without any basic limit, and would apply even if the payment were as little as Rs 1,000. The rate of tax would depend upon the type of payment and the tax treaty with the country of residence of the non-resident to whom you are making the payment.
There could be various real-life situations where such tax is required to be deducted at source. For example, you may have taken a house on rent from a non-resident Indian (NRI). In this case, you are required to deduct TDS at 30% of the rent each month even though you are paying the rent in rupees in India. Then, you may be purchasing a house in India from an NRI and paying the full consideration in rupees in India. In this case, you are required to deduct TDS at 20% of the purchase price. You may have taken a loan from an NRI relative and may be repaying the loan with interest. Here, you are required to deduct TDS on the interest that you pay. Even a gift to an NRI cousin in India may attract TDS.
When you pay interest to a branch of a foreign bank in India on a home loan, car loan or a credit card or any other loan, or any type of bank charges, strictly speaking, you are required to deduct TDS. Fortunately, most of these banks obtain a certificate from the tax department each year, authorizing receipt of income from customers without TDS, and you may be spared from the rigours of deduction of TDS. Purchase of an air ticket from a foreign airline also normally does not attract TDS because most such airlines obtain similar certificates from tax authorities each year. Nevertheless, it is your responsibility to ask for and check the existence of such a certificate.
To complicate matters, the tax authorities have now been taking the stand that purchase of a software amounts to payment of a royalty and attracts the requirements of TDS. So when you download a software from the Internet and pay for it to a foreign company with your credit card, you are required to deduct TDS. If the tax authorities stand is correct, you would have to deduct TDS every time you pay and download an app from the Apple App Store, BlackBerry App World or Nokia Ovi Store, or even purchase an anti-virus package from a foreign company on the net. TDS may even apply to download of e-books from foreign websites. Though a high court has agreed with the tax authorities’ view, fortunately a majority of decisions seem to indicate that their view is not justified.
Again fortunately, the requirement of TDS does not apply to payments for purchase of articles from a foreign company, unless the sale takes place in India (which is rarely the case). TDS also normally does not apply to payments of subscriptions to foreign magazines as well as for subscription to foreign databases (though the tax authorities have disputed the issue of database subscription). TDS may or may not apply to payments to foreign professionals rendering services to you depending upon the country of residence of the foreign professional, the type of services rendered and the place where they are rendered.
You may choose to ignore the requirement of deduction in the belief that non-compliance and your transactions with non-residents may not come to the notice of tax authorities. However, the increasing computerization of the tax network will ensure that, sooner or later, these issues are bound to catch up with you and you may then be saddled with not only the liability of the amount of TDS which you failed to deduct, but also pay interest and penalty.
All in all, the subject of TDS from payments to non-residents is a complex subject, which often leaves even tax professionals confused. Is the government then justified in exposing even a lay person to such onerous and complex requirements of TDS? Does the government believe that everybody has the same infrastructure to cope with the requirements of TDS as a businessman does? Ordinary citizens have enough problems to face in their daily lives without the additional burden of complying with TDS requirements. Should the government not amend the tax laws relating to TDS from non-residents and make life simpler for ordinary citizens who do not carry on a business or profession, instead of leaving the dangling sword of TDS hanging over their heads?
Gautam Nayak is a chartered accountant.