Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

Clause 393 of the Income Tax Bill, 2025, is a comprehensive provision governing the deduction of tax at source (TDS) on a wide variety of payments made to both residents and non-residents. Within this provision, sub-section (2), and specifically Table S.No. 17, is of particular significance as it addresses the obligation to deduct tax at source on payments of interest (not otherwise specified), and on any other sum chargeable under the Act (excluding income chargeable under the head "Salaries") to non-residents. Section 195 of the Income-tax Act, 1961, is the corresponding provision in the existing law and has for decades been the cornerstone of the TDS regime applicable to payments made to non-residents. The provision is widely regarded as a critical anti-avoidance measure, ensuring that tax due on income accruing, arising, or deemed to accrue or arise in India to non-residents is collected at the earliest point of payment or credit. The proposed Clause 393(2)[Table: S.No.17] essentially seeks to modernize, clarify, and possibly rationalize the TDS obligations in respect of payments to non-residents, while also aligning with global best practices and India's evolving tax policy framework. This commentary provides a detailed analysis of the new provision, its objectives, structure, and practical implications, and then undertakes a comprehensive comparative analysis with the existing Section 195.

Objective and Purpose

The primary objective of Clause 393(2) and, more specifically, Table S.No. 17, is to ensure the collection of tax at source on payments to non-residents in respect of income chargeable under the Act, other than salaries. The legislative intent is multi-fold:

• To prevent revenue leakage by ensuring that tax due on non-resident income is collected at the earliest possible stage.
• To provide clarity and specificity regarding the types of payments subject to TDS, the persons responsible for deduction, and the applicable rates.
• To streamline the TDS framework for non-residents, distinguishing between various types of income and aligning rates and procedures with contemporary economic realities.
• To harmonize the Indian TDS regime with international tax norms and address practical challenges faced by payers and payees.

The provision is also intended to address issues that have arisen u/s 195, such as ambiguities regarding the scope of "any other sum chargeable", the timing of deduction, and the interplay with Double Taxation Avoidance Agreements (DTAAs).

Detailed Analysis of Clause 393(2)[Table: S.No.17] of the Income Tax Bill, 2025

1. Text and Scope of Table S.No. 17

2. Key Components

• Nature of Payment: The provision is residuary in nature, covering any interest (other than those specifically dealt with in serial numbers 2, 3, 4, and 5 of the table) and any other sum chargeable under the Act, except salaries.
• Payee: The provision applies to payments made to any non-resident (individual or entity), including foreign companies.
• Payer: The obligation is imposed on "any person" making such payment, thus covering both residents and non-residents, individuals, firms, companies, etc.
• Rate: The tax is to be deducted at the "rates in force," which refers to the applicable rate as per the Finance Act or as per relevant DTAA, whichever is more beneficial to the assessee (subject to procedural compliance).
• Timing: Tax is to be deducted at the time of credit of such income or sum to the account of the payee or at the time of payment, whichever is earlier.
• Exclusion: The provision specifically excludes income chargeable under the head "Salaries," which is governed by separate TDS provisions.

3. Relationship with Other Serial Numbers

Serial numbers 2, 3, 4, and 5 of the table in Clause 393(2) deal with specific types of interest and distributed income (e.g., interest on certain bonds, infrastructure debt funds, etc.) with their own rates and conditions. Serial number 17 thus acts as a catch-all provision for all other forms of interest (not covered elsewhere) and any other sum chargeable under the Act (excluding salaries).

4. Procedural Provisions and Safeguards

Clause 393(2) must be read together with the other sub-sections of Clause 393, which provide for:

• Exemptions and exceptions (sub-sections (4), (8), and (9)), such as payments to government, RBI, certain mutual funds, etc.
• Declarations and certificates for non-deduction or lower deduction.
• Clarification that credit to a suspense account is deemed to be credit to the payee's account.
• Grossing up provisions where tax is borne by the payer.

5. Interaction with DTAAs

The "rates in force" expression includes the rate as per the relevant DTAA, if applicable and more beneficial to the assessee, subject to compliance with procedural requirements (such as furnishing of tax residency certificate, Form 10F, etc.).

Practical Implications

1. For Payers

• Payers must identify whether the payment falls within the scope of S.No. 17 or is covered by a specific serial number (e.g., interest on specific bonds).
• They must determine the residential status of the payee and the chargeability of the sum under the Act.
• Payers must apply the correct rate, considering both the Finance Act and any applicable DTAA, and ensure compliance with documentation requirements.
• There is an obligation to deduct tax even if the payment is credited to a suspense account or any other account by whatever name called.
• In cases where only a portion of the payment is chargeable to tax in India (e.g., for services rendered partly in India), payers may need to approach the tax authorities for determination of the appropriate proportion (mirroring the mechanism u/s 195(2)).

2. For Non-Resident Payees

• Non-residents may be subject to TDS on a wide variety of payments, including interest, royalties, fees for technical services, consultancy fees, etc., unless specifically exempted.
• They have the option to apply for a certificate for nil or lower deduction if their effective tax liability is lower (e.g., due to DTAA benefits or lack of chargeability).
• They may be required to provide documentation, such as tax residency certificates, to avail of treaty benefits.

3. For Tax Administration

• The provision ensures early collection of tax and reduces the risk of non-compliance by non-residents.
• It provides a clear framework for enforcement, including penalties for non-deduction or short deduction.
• It allows the tax authorities to monitor cross-border payments and detect possible tax avoidance schemes.

4. Challenges and Ambiguities

• The phrase "any other sum chargeable under the provisions of this Act" is broad and may give rise to interpretational issues, especially in cases involving composite contracts or payments for services rendered both within and outside India.
• Determining the chargeability of a payment (e.g., in cases of reimbursement, cost-sharing, or payments for offshore services) can be complex.
• Procedural compliance (such as obtaining lower/nil deduction certificates or determining the appropriate proportion chargeable) may be burdensome for both payers and payees.

Comparative Analysis with Section 195 of the Income-tax Act, 1961

1. Textual Comparison

Section 195(1) provides:

Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC or section 194LD) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Clause 393(2)[Table: S.No. 17] provides a nearly identical obligation, with the following key similarities and differences:

• Scope: Both provisions apply to any person making a payment to a non-resident or foreign company, in respect of interest (not otherwise specified) or any other sum chargeable under the Act (excluding salaries).
• Timing: Both require deduction at the earlier of credit or payment.
• Rates: Both require deduction at "rates in force."
• Exclusion of Salaries: Both exclude income chargeable under the head "Salaries."
• Interest Carve-Outs: Section 195 refers to exclusions for interest covered u/ss 194LB, 194LC, and 194LD, whereas Clause 393(2) refers to serial numbers 2, 3, 4, and 5 of its own table, which correspond to various specific interest incomes (e.g., infrastructure bonds, rupee-denominated bonds, etc.).
• Specificity: The new clause is more granular in segregating different types of payments and rates within its table, whereas Section 195 relies on cross-references to other sections.

2. Mechanisms for Determination of Chargeability

Both provisions recognize that not all payments to non-residents are fully chargeable to tax in India. Section 195(2) allows the payer to apply to the Assessing Officer to determine the appropriate proportion of the sum chargeable, so that tax is deducted only on that portion. Clause 393(2) does not explicitly restate this mechanism but, read with the general procedural framework, is likely to continue to allow such applications.

3. Certificates for Nil or Lower Deduction

Section 195(3)-(5) allows the payee to apply for a certificate for receipt of sums without deduction or with lower deduction, subject to prescribed rules. Clause 393, as part of its overarching TDS regime, provides for similar mechanisms for declarations and certificates for non-deduction or lower deduction.

4. Furnishing of Information

Section 195(6) requires the payer to furnish prescribed information regarding payments to non-residents, irrespective of chargeability. This is a key compliance requirement, intended to improve tax administration and monitoring. Clause 393(2) does not explicitly restate this, but such requirements are likely to be carried forward in the rules or in other provisions of the new Act.

5. Grossing Up and Suspense Account Credits

Both provisions contain anti-avoidance features:

• Section 195 Explanation 1 and Clause 393(11) both provide that credit to a suspense account is deemed to be credit to the payee's account, thus triggering TDS.
• Grossing up provisions (i.e., where the payer bears the tax liability) are also present in both regimes.

6. Exemptions and Exclusions

Section 195, read with various notifications and the Act, provides for exemptions (e.g., payments to government, RBI, certain mutual funds, etc.). Clause 393(2) has a more detailed and tabulated approach to exemptions and exceptions, which may provide greater clarity and ease of reference.

7. Interaction with DTAAs

Both regimes recognize the primacy of DTAAs, with the "rates in force" including treaty rates where more beneficial, subject to procedural compliance.

8. Practical Differences and Improvements

• Clause 393(2) is more structured, with detailed tables specifying rates, payers, payees, and exceptions, which may reduce ambiguity.
• The new provision appears to consolidate and rationalize various TDS obligations, potentially making compliance simpler for taxpayers and administrators.
• The explicit tabulation of exceptions and threshold limits in Clause 393 may enhance certainty and reduce litigation.
• The new clause may address certain interpretational issues that have arisen u/s 195, such as the "sum chargeable" concept, by providing more detailed guidance.

9. Potential Areas of Concern

• The broad language of "any other sum chargeable" remains, and could still give rise to disputes regarding the scope of TDS, especially in cross-border service arrangements, software payments, and composite contracts.
• The procedural burden of determining chargeability, obtaining certificates, and furnishing information remains significant.
• The practical effectiveness of the new provision will depend on the clarity of implementing rules and administrative guidance.

Conclusion

Clause 393(2)[Table: S.No.17] of the Income Tax Bill, 2025, represents a modernized and more structured approach to the deduction of tax at source on payments to non-residents, closely mirroring the existing Section 195 of the Income-tax Act, 1961, but with greater specificity and clarity. The provision seeks to address the core policy objectives of preventing revenue leakage, providing certainty to taxpayers, and aligning the Indian TDS regime with international best practices. The comparative analysis reveals that while the substantive obligations remain largely unchanged, the new provision offers improvements in terms of clarity, granularity, and ease of reference. However, certain challenges-such as the determination of chargeability, procedural compliance, and the risk of overlapping or conflicting provisions-persist and will need to be addressed through detailed rules and administrative guidance. Overall, Clause 393(2)[Table: S.No.17] is a critical component of India's evolving tax law framework, and its effective implementation will be key to ensuring both tax compliance and ease of doing business in a globalized economy.

Full Text:

Clause 393 Tax to be deducted at source.