TDS & Cross-Border Transactions: Avoiding Compliance Pitfalls

Introduction

Tax Deducted at Source (TDS) is a mechanism introduced by the Indian government to collect tax at the point of origin of income. When making international payments, especially for services or goods, the applicability of TDS depends on various factors, including the nature of the transaction, the recipient's residential status, and whether the payment is taxable under the Income Tax Act, 1961.

This article explores whether TDS needs to be deducted when making international payments through a credit card without furnishing CA (Chartered Accountant) and CB (Certificate of Business) forms.

Understanding TDS on International Payments

International payments are subject to scrutiny under the Income Tax Act, the Foreign Exchange Management Act (FEMA), and RBI guidelines. The applicability of TDS is determined based on:

• Nature of the payment (goods, services, royalty, software, etc.).
• Residential status of the payee.
• Applicability of Double Taxation Avoidance Agreements (DTAA).
• Provisions under Section 195 of the Income Tax Act.

Payments Covered Under TDS

Under Section 195 of the Income Tax Act, any payment made to a non-resident, which is chargeable to tax in India, is subject to TDS. The applicable rates depend on the nature of the service and DTAA provisions.

However, certain types of transactions may not attract TDS:

1. Import of Goods: Payments for physical goods are generally not subject to TDS.
2. Personal Expenses: If the international payment is for personal purposes (e.g., travel bookings, entertainment subscriptions), it is not subject to TDS.
3. Software Purchases: If software is acquired for commercial use and classified as a royalty, TDS may apply. However, if it is treated as a copyrighted product rather than a copyright transfer, TDS might not be applicable.

Impact of Payment Mode – Credit Card Transactions

When payments are made through credit cards, the following aspects need to be considered:

• Payments made through international merchants using a credit card are often processed by financial intermediaries like Visa or Mastercard. These payments might not be directly classified as remittances under Section 195.
• As per recent RBI guidelines, TCS (Tax Collected at Source) under LRS (Liberalized Remittance Scheme) may apply on foreign spending above a specified threshold.
• If the payment is business-related and qualifies as taxable in India, TDS may still apply.

Role of CA & CB Forms

CA & CB Forms (Form 15CA & 15CB) are required for remittances abroad, as mandated by the Income Tax Department. The purpose of these forms is to certify whether a payment made to a non-resident is taxable in India.

• Form 15CA: A declaration of remittance submitted by the remitter.
• Form 15CB: A certification from a Chartered Accountant ensuring compliance with TDS provisions and DTAA.

Is CA & CB Mandatory for Credit Card Payments?

• For small personal transactions: Generally, CA & CB forms are not required.
• For business-related payments: If payments are considered taxable under Section 195, CA & CB forms may be required, especially for substantial transactions.

Conclusion

Whether TDS needs to be deducted on international payments via credit card depends on the nature and purpose of the transaction:

• Personal transactions usually do not attract TDS.
• Business-related transactions may require TDS deduction under Section 195.
• If payments exceed the LRS threshold, TCS may apply.

It is advisable to consult a tax professional before making significant international payments to ensure compliance with tax regulations.

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