Fast forward to July 1, 2022, when the initiation of “Withholding tax” was implemented in India, whereby tax was deducted or retained from specific income categories, such as wages, interest, dividends, and royalties. These were withheld while being paid to the assignee (non-resident individual). The primary objective behind withholding tax in India is to enable the government to collect a portion of the income tax due from the recipient, reduce tax evasion by non-resident Indians (NRIs), and ensure they pay their equitable tax obligation on earnings received within the country.
This obligation to withhold tax by the payer when remitting salary, rent, commission, or payment for business or professional services is to fulfill the contract stipulations. The application of this type of tax is done regarding payments of non-resident individuals. Section 195 of the Income Tax stipulates the obligation of the payee to deduct tax while making a payment deposit in the account of the Non-Resident Individual and deposit the tax write-off with the government.
The taxable income from withholding tax in India depends on the income streams, earnings, and tax legislation of the country where the income or wages are earned. The imposition of the tax slab is prescribed by the Income Tax Act 1961 or the Double Taxation Avoidance (DTA), whichever has a lower value. The Central Government of India is responsible for tax collection.
The Process of Reclaiming Withholding Tax in India
To initiate and steer forward the process of claiming withholding tax in India calls for a well-developed understanding of the rules of procedure, which cover the completion and filing of particular forms.
1. Submission of Forms 15 CA and 15 CB
Form 15 CA confirms tax deduction at source (TDS) on payment deposits made to non-residents or foreign companies. This form is a declaration filed by a resident payer before sending any remittance to an NRI or foreign corporation. The form is submitted online to the Income Tax Department and submitted to the remitting bank before making the payment. Form 15 CA works as a verification point before the despatch of money outside India.
Form 15 CB is a certificate granted by a Chartered Accountant verifying the compliance of the proposed remittance according to the Income Tax Act provisions and applicable Double Taxation Avoidance Agreements (DTAAs). Form 15 CB contains information related to the remitter and recipient, the amount of payment, tax liability under Indian legislation, applicable DTAA provision, if present, the rate and amount of TDS deducted, and the nature and the reason for the money transfer. This form is exclusively required for payments made to Non-Resident Indians (NRIs) who are liable for tax and in cases where the payment exceeds INR 5 Lakh.
Both these forms function as vital instruments for monitoring payments to non-residents and ensuring that the appropriate tax has been deducted at the source.
2. Procure a Genuine PAN in India
You need to possess a valid PAN in India. All credits related to TDS are linked to your PAN, and you require it to submit your tax return.
3. Acquire TDS Certificates
Request every Indian remitter who has deducted tax from your wage payments to furnish the relevant TDS certificate:
- Form 16A: For remuneration, rent, or interest.
- Form 16B: For TDS in case of sale of immovable property.
- Form 16C: For TDS on payment of rent to be issued by the tenant to the receiver of rent for payment of rent by individuals or HUFs.
4. Scrutinize Your Form 26AS
Before submitting your tax return, download the Income Tax e-Filing Portal Form 26AS, which displays the TDS credited against your PAN.
See to it:
- Information in Form 26AS corresponds with your TDS certificates.
- Each deduction is recorded; if not, check in with the deductor
5. Acquire a Tax Residency Certificate (TRC) From Your Country
To request relief under a Double Taxation Avoidance Agreement (DTAA), acquire a TRC from the taxing authority in your home country. This demonstrates that you are a tax resident overseas.
6. Complete Form 10F
Form 10F permits NRIs to access tax deductions or even total immunity from withholding tax on wages earned in India under relevant DTAAs. It also validates your tax residency presence with the Indian government. Payers need a copy while making payments, and it can be suitable for your tax submission.
7. File Your Indian Income Tax Return (ITR)
- Access the online filing site of the Income Tax Department and submit the relevant ITR ( commonly ITR-2 or ITR-3 for NRIs).
- Disclose all Indian earnings and claim TDS deductions.
Include TDS details from Form 26AS.
- Seek DTAA relief if you qualify – Disclose income under the DTAA provisions of the Income Tax Act, quoting the article under which you are eligible for exemption or a discounted rate.
Place your demand for the TDS amount while submitting your ITR or, in rare instances, through individual claim processing, subject to the applicable Double Taxation Avoidance Agreement (DTAA).
8. Reimbursement and Processing
- If TDS deductions exceed your tax obligation, the Income Tax Department will reimburse the money and deposit it in your bank account.
Note: Your bank account must be Indian, as refunds are issued only to Indian bank accounts that are operational for the Electronic Clearing Service (ECS). NRIs should use their NRO account to receive refunds.
- You can monitor the refund status online via the TIN NSDL Refund Status
Take Note of: A refund can be issued and is possible on condition that the foreign or immigrant resident or foreign firm declares the income to fall below the income upon which there is a deduction of withholding tax.
Interest, Technical Service, and Royalty income, taxed at lower rates, do not qualify for refund claims in the event of the individual or company earning income exclusively from these sources. In such a case, they have no obligation to submit the income tax return in India.
Summing Up
This is most critical to have the correct documentation and paper records for the withholding tax reclaim process in India. Correct documentation may include actual invoices, tax residency certificate and agreements which are needed for the preparation of Forms 15CA and 15CB. Remaining updated on tax treaties and regulations that have a bearing on withholding tax rates and scope for reclaim enables you to initiate proactive measures to optimize tax efficiency.
Our well-informed team of Chartered Accountants provides valuable guidance. It ensures compliance with tax regulations and treaty benefits, helping to navigate the challenges of withholding tax claims and optimizing investment returns.
