The Central Board of Direct Taxes (CBDT), the apex administrative authority for direct taxes in India, has issued Instruction No. 2/2014 [Instruction] to the Indian Tax Authority on the issue of whether tax withholding is required on the whole sum being remitted to a non-resident (NR) or only with reference to the portion of remittance representing the sum chargeable to tax in India under the Indian Tax Laws (ITL). In light of certain judicial developments in India, the CBDT has directed the Tax Authority to determine the appropriate portion of payments which is chargeable to tax in India and, accordingly, a payer can be treated as a defaulter for not withholding tax only in respect of such portion of the payment which is chargeable to tax in India under the ITL.
This Tax Alert summarizes the above Instruction issued by the CBDT.
The Instruction to the Indian Tax Authority is a welcome development for payers/tax deductors. This Instruction clarifies that withholding tax liability of the payer is with reference to the sum chargeable to tax under the provisions of the ITL. Furthermore, the consequences of default proceedings for non-withholding under the ITL would be limited only to such tax liability. Accordingly, a payer cannot be treated as an assessee-in-default for non-withholding from payments which are not chargeable to tax under the ITL. This clarification is in line with the SC decision in the case of GE. Furthermore, in respect of remittances where only a portion may be chargeable to tax in India (for e.g., a portion of composite contract or capital gains income), payer may determine its withholding tax liability with reference to the chargeable portion of the remittance, if the payer is fairly certain about such determination. However, considering the consequences of tax withholding default, the payer may prefer to be cautious and may continue to approach the Tax Authority where determination of chargeability or portion of the chargeable sum is not fairly certain
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