Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Are you making a payment to a non-resident?

Making payment at foreign websites could now be financially hazardous for you

Do you download software, songs, or movies from the Internet from foreign websites, making payments through Netbanking or credit card? Do you buy goods such as books from global websites, such as eBay Global EasyBuy or Amazon.com? These transactions, along with many others, could now be financially hazardous for you, beginning 1 June 2015. A couple of amendments made in the last budget, which come into effect from 1 June 2015, are likely to cause this problem.

Tax has always been required to be deducted at source from payments to non-residents, if the amounts paid represent income of the non-resident chargeable to tax in India. This tax deduction provision applies not only to a person carrying on business, but to every individual, even if she is a salaried employee. Normally, purchase of goods is not taxable, while purchase of software, songs or movies is taxable since an amendment to the law in 2012. Practically, however, since the amounts paid for such downloads is small, most individuals did not bother to deduct tax at source from such payments (or did not do so out of ignorance about such provisions). Further, the tax, if any, would practically have to be borne by the purchaser, since she would be unable to recover it from the non-resident payee, as the website would not process her transaction unless full payment is made.

The first amendment is that details of such payments to non-residents are required to be filed online on the income tax department’s website, irrespective of whether the payments are taxable or not. Earlier, the requirement of online furnishing of details was only required if the payment was taxable. Therefore, online furnishing of details is now effectively extended to payments for purchase of books or other goods from foreign vendors. If the amount of payment exceeds 50,000, or the total payments in the financial year to one entity exceed 2.50 lakh, a chartered accountant’s certificate also has to be obtained, certifying the tax deductible (even if there is no tax involved).

The second amendment is the introduction of a penalty of 1 lakh for not furnishing such details online. The penalty is a flat amount, irrespective of the amount of tax involved. So, if you purchase a software for 6,000, and were required to have deducted tax of 600, besides the tax of 600 that can be recovered from you, a penalty of 1 lakh can be levied on you for not filing the details of the payment online on the tax department’s website. While there is a provision for waiver of penalty if there is a reasonable cause, ignorance of law cannot be regarded as a reasonable cause.

The income tax rules do provide some exemptions, though limited. Payments for business or personal travel expenses (which would include online booking of hotels or rail tickets) are excluded, as are remittances for investments abroad in shares, debt securities or real estate, maintenance of close relatives, education expenses, gifts and donations. These exemptions, however, are few, and still leave a large number of transactions subject to reporting.

The question which arises is should all individuals have such onerous tax deduction and reporting requirements in respect of even small outward remittances? Should there not be an exemption from reporting for purchase of goods such as books, where no tax deducted at source (TDS) is required? Should there not be a small threshold exemption, as in case of other TDS provisions?

The difference here, of course, is that payments to non-residents would escape tax altogether, if such transactions are not subject to TDS, unlike in the case of residents, who are required to file tax returns in India. But what would be the tax impact if small payments (involving tax of less than about 1,000) to non-residents by individuals, who are not carrying on any business, were provided an exemption? Alternatively, could such tax (involving small amounts, where tax is borne by the payer, because she cannot recover it from the payee) not be paid at the time of filing the normal income tax return?

Also, should the penalty be so harsh? Can it not be restricted to the amount of tax involved, as in the case of certain other penalty provisions? Merely saying that in practice, it may be only in a few cases that such non-furnishing of information is pursued, and that the penalty may not be levied on too many people, is not the solution to the problem. Nobody likes to have a hanging sword over their heads.

One hopes that just as the government was responsive to the difficulties faced by taxpayers in filling their income-tax returns, it will soften the harassment of the common man through such impractical legal provisions, by diluting their applicability through amendments to the rules. This way the provisions will apply only in cases that involve larger amounts of tax, and that too for deliberate non-furnishing on account of non-deduction. Those who inadvertently did not furnish information will be spared.

Gautam Nayak is a chartered accountant.

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