Grossing Up Mechanisms in Indian TDS Law : Clause 393(10) of the Income Tax Bill, 2025 Vs. Section 195A of the Income-tax Act, 1961

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....nderlying both provisions is that, for the purposes of TDS, the income on which tax is to be deducted must be increased to such a level that, after deducting the tax, the net amount matches the contractual obligation to the payee. This commentary provides a detailed examination of Clause 393(10), its objectives, interpretative nuances, practical implications, and a comparative analysis with Section 195A of the 1961 Act. The analysis also considers relevant legal principles, administrative practice, and the broader context of TDS compliance in India. Objective and Purpose The legislative intent behind Clause 393(10)-as with Section 195A-is to ensure that the tax base is not eroded in cases where the payer assumes the tax liability of the ....

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....hich deals with specific salary-related scenarios). * Agreement or Arrangement: The trigger is the existence of an agreement or arrangement where the payer undertakes to bear the tax liability of the recipient/payee. * Grossing Up Mechanism: The income is to be "increased to an amount" such that, after TDS at the applicable rate, the net amount matches the contractual (net) payment to the payee. * Purpose: The grossed-up amount is the base for TDS, ensuring the intended net payment is achieved after tax deduction. Interpretative Considerations * Wording Consistency: The language of Clause 393(10) closely mirrors Section 195A, with a minor refinement to refer to "income of the recipient referred to in this Chapter." This clarifies t....

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....esence of surcharge and cess can complicate the computation. The "rate as per provisions of this Chapter" must be interpreted to include all applicable add-ons. * Composite Payments: In cases where a single payment includes multiple components (some taxable, some not), the grossing-up should only apply to the taxable portion. * Foreign Exchange Fluctuations: In cross-border transactions, currency fluctuations between the date of agreement and payment can create discrepancies in net receipts. * Dispute on Net-of-Tax Clauses: The existence and enforceability of a net-of-tax clause can sometimes be disputed, especially if the contract is ambiguous or silent on tax treatment. Practical Implications For Payers * Increased Cost: Where t....

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...., for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement." Similarities * Substance: Both provisions impose the obligation to gross up the income where the payer assumes the tax liability. * Exclusion of Salary Cases: Both carve out salary TDS scenarios, which have separate grossing-up provisions. * Trigger: Both are triggered by an agreement or arrangement to pay net of tax. * Computation: Both require the income to be increased such that, after TDS, the net amount matches the contractual payme....

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....at the beneficial DTAA rate, if applicable. Practical Examples under Both Regimes The computation process remains unchanged: * u/s 195A: If a net payment of Rs. 1,00,000 is to be made and the TDS rate is 10%, the grossed-up amount is Rs. 1,11,111. * Under Clause 393(10): The same computation applies, but the base for grossing-up is more clearly defined by the new tables and thresholds. Potential Issues and Ambiguities * Multiple TDS Provisions: The new Bill's tabular structure may lead to questions about which TDS entry applies, but once identified, Clause 393(10) applies uniformly. * Transition Issues: During the shift from the 1961 Act to the new Bill, contracts referencing the old law may require renegotiation or clarifica....