Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The taxation of cross-border investment income, particularly that arising from foreign currency bonds and Global Depository Receipts (GDRs) issued by Indian companies, has been a significant aspect of India's fiscal framework, aiming to foster foreign investment while safeguarding revenue interests. The mechanism of Tax Deduction at Source (TDS) acts as a crucial compliance and enforcement tool in this context. This commentary undertakes a granular legal analysis of Clause 393(2), specifically [Table S. No. 13 and 14] of the Income Tax Bill, 2025, juxtaposed with the existing Section 196C of the Income-tax Act, 1961. It dissects legislative intent, operational mechanisms, practical implications, and the comparative evolution of these provisions, with a focus on both statutory interpretation and policy objectives.

Objective and Purpose

The primary objective of TDS provisions on income from foreign currency bonds and GDRs is twofold: to ensure timely collection of tax at the point of income accrual or payment to non-residents, and to provide certainty and clarity to foreign investors regarding their tax obligations in India. Section 196C, introduced in 1992 and subsequently amended, was designed to operationalize the concessional tax regime u/s 115AC, which was itself a measure to promote foreign investment in Indian debt and equity through internationally recognized instruments. The new Income Tax Bill, 2025, through Clause 393(2) Table S. No. 13 and 14, seeks to continue this regime, while updating rates and procedural aspects to reflect current policy priorities and market realities.

Detailed Analysis of the Clause 393(2)[Table S. No. 13 and 14] of the Income Tax Bill, 2025

1. Statutory Text and Coverage

• Serial No. 13: "Any income by way of interest or dividends in respect of bonds or Global Depository Receipts referred to in section 209."
  Payee: Any non-resident
  Payer: Any person
  Rate: 10%
• Serial No. 14: "Any income by way of long-term capital gains arising from the transfer of bonds or Global Depository Receipts referred to in section 209."
  Payee: Any non-resident
  Payer: Any person
  Rate: 12.5%

These entries specify the nature of income, the class of payee (non-resident), the class of payer (any person responsible for payment), and the applicable TDS rates. The reference to "section 209" in the Bill is the functional equivalent of the reference to "section 115AC" in the 1961 Act, which defines the eligible bonds and GDRs.

2. Timing and Mode of Deduction

Clause 393(2) mandates deduction of tax at the time of credit of income to the account of the payee or at the time of payment by any mode, whichever is earlier. This mirrors the established legal position under the 1961 Act, ensuring that TDS is not deferred or avoided by mere book entries or delayed payments.

3. Scope of Instruments Covered

The provision covers:

• Interest and dividends on bonds or GDRs (S.No. 13)
• Long-term capital gains from transfer of such bonds or GDRs (S.No. 14)

The underlying instruments must be those referred to in section 209, which, by analogy with section 115AC, are foreign currency bonds or GDRs issued in accordance with notified schemes and conditions.

4. TDS Rates and Their Rationale

The prescribed rates are:

• 10% for interest or dividends
• 12.5% for long-term capital gains (LTCG) from transfer (notably, the rate for LTCG is increased from 10% to 12.5% for transfers on or after 23 July 2024, as per the 2024 Finance Act amendments)

These concessional rates are designed to promote foreign investment in Indian debt and equity markets, balancing the need for tax revenue with the imperative to maintain India's attractiveness as an investment destination.

5. Procedural and Compliance Requirements

The person responsible for payment is required to deduct tax at the specified rates, deposit the TDS with the government, and comply with reporting obligations (such as TDS returns and issuance of TDS certificates). The provision also ensures that TDS liability arises irrespective of the mode of payment (cash, cheque, draft, electronic transfer, etc.).

6. Exemptions and Interplay with Other Provisions

Unlike some other TDS provisions, S.No. 13 & 14 do not specify any threshold limit-TDS is to be deducted on the entire sum payable. The provision is also subject to the general machinery provisions of Clause 393 (such as declarations for nil TDS, non-applicability to exempt incomes, and higher TDS in case of non-furnishing of PAN).

7. Legal and Policy Implications

By explicitly codifying the TDS rates and obligations for these instruments, the Bill reduces ambiguity and ensures uniformity of treatment. It also facilitates effective enforcement and compliance by payers, including Indian companies and intermediaries remitting income to non-residents.

Comparative Analysis with Section 196C of the Income-tax Act, 1961

1. Scope and Coverage

• Clause 393(2) S. No. 13 & 14: Applies to any non-resident receiving interest/dividends or long-term capital gains from bonds or GDRs referred to in section 209 of the Bill. The language is broad and includes any person making the payment.
• Section 196C: Applies to any non-resident receiving interest/dividends or long-term capital gains from bonds or GDRs referred to in section 115AC. The reference to section 115AC is explicit, ensuring only qualifying instruments are covered.

Both provisions are substantively similar in scope, targeting the same categories of income and payees, with the cross-reference to the defining section for eligible instruments.

2. Rates of Deduction

• Interest/Dividends: Both prescribe a 10% TDS rate.
• Long-term Capital Gains: Both prescribe a 12.5% TDS rate (for transfers on or after 23 July 2024). Section 196C also provides for a 10% rate for transfers before that date, reflecting the transition.

The alignment of rates signals continuity and stability in the tax regime for foreign investors. The rate increase for capital gains post-23 July 2024 is mirrored in both the existing and proposed law.

3. Timing and Mode of Deduction

• Both require deduction at the time of credit or payment, whichever is earlier, and cover all modes of payment.

4. Payer's Responsibility

• Both provisions cast the obligation on "any person" responsible for making the payment, ensuring wide coverage and preventing circumvention.

5. Exemptions and Carve-outs

• Exemptions in both regimes are limited and generally relate to income not chargeable to tax under the Act (e.g., DTAA relief, specific statutory exemptions).
• The Bill's Clause 393(4) S. No. 14 clarifies that TDS is not required where the income is not chargeable to tax, which is an implicit principle under the 1961 Act but now made explicit.

6. Reference to Underlying Instrument

• Section 196C refers to section 115AC for the definition of qualifying bonds and GDRs, while Clause 393(2) refers to section 209 (presumably the corresponding provision in the new Bill), maintaining the same structural approach.

7. Legislative Clarity and Modernization

• The Bill's language is more streamlined, reflecting current drafting standards and removing obsolete references (e.g., to DDT or older payment modes).
• Section 196C has been periodically updated to reflect market developments (e.g., inclusion of GDRs, change in rates, payment modes), and the Bill consolidates these changes in a single, coherent provision.

8. Interaction with DTAAs

• In both regimes, TDS rates can be reduced by application of a DTAA, provided the non-resident furnishes a valid Tax Residency Certificate and other documentation as prescribed.

9. Compliance and Procedural Aspects

• Both require the payer to comply with TDS return filing, issuance of TDS certificates, and maintenance of documentation. The Bill may introduce updated compliance procedures in line with digitalization and ease of doing business.

Comparative Table

1. Key Similarities

• Nature of Income Covered: Both the old and new provisions apply to interest, dividends, and LTCG from bonds or GDRs issued under the specified section (115AC/209).
• Payee and Payer: Both apply to payments to non-residents by any person responsible for payment.
• Timing: TDS is to be deducted at the earlier of credit or payment, regardless of mode.
• Rates: The rates are harmonized-10% for interest/dividends, 12.5% for LTCG on or after 23 July 2024.
• No Threshold: Neither provision prescribes a minimum threshold; TDS applies to the entire amount.
• Procedural Parity: Both require compliance with general TDS procedures under the Act.

2. Key Differences and Modernizations

• Legislative Structure: The 2025 Bill consolidates all TDS provisions into a single, tabular format under Clause 393, whereas the 1961 Act scattered them across multiple sections (including 196C, 115AC, and related rules). This enhances accessibility and reduces interpretative disputes.
• Reference Section: The Bill refers to "section 209" (presumably the new analog of section 115AC), signaling a recasting of the substantive provisions relating to eligible bonds and GDRs.
• Explicit LTCG Rate Change: The Bill directly incorporates the LTCG rate change (from 10% to 12.5% post-23 July 2024) in its TDS table, reflecting the latest Finance Act amendments. Section 196C, as amended, also provides for this, but the Bill's approach is more user-friendly.
• Integration with General TDS Framework: Clause 393(2) sits within a comprehensive TDS regime, cross-referencing declarations for nil TDS, exceptions, and anti-abuse rules. Section 196C was more standalone, requiring cross-reference to other sections for exceptions and procedures.
• Omission of Redundant Provisos: The new Bill omits now-redundant provisos (such as the exemption for dividends covered by section 115-O, which is no longer relevant post-abolition of Dividend Distribution Tax).
• Digital and Modern Compliance: The Bill is drafted to be technologically neutral, recognizing all modes of payment and digital record-keeping, in line with contemporary business practices.

Practical Implications

For Foreign Investors

• Certainty regarding tax rates and deduction mechanisms, facilitating investment decisions.
• Ability to claim credit for TDS against final tax liability in India or home country, subject to applicable DTAA provisions.
• Administrative ease, as tax is withheld at source, obviating the need for filing returns in certain cases (subject to other income).
• Potential impact of rate increase on capital gains post-23 July 2024, requiring recalibration of investment strategies and post-tax return calculations.

For Indian Payers/Issuers

• Obligation to correctly identify qualifying instruments and non-resident payees, apply the appropriate TDS rate, and ensure compliance with documentation and reporting requirements.
• Exposure to interest, penalties, and disallowance of expenditure for non-compliance.
• Need to monitor DTAA eligibility and documentation to apply reduced rates where applicable.

For Tax Administration

• Clarity and uniformity in TDS provisions facilitate enforcement and reduce disputes.
• Scope for data-driven monitoring and risk assessment, especially with digital reporting and cross-border information exchange.

Ambiguities and Issues in Interpretation

• Definition of Qualifying Instruments: The cross-reference to section 209 (or 115AC) is critical; any ambiguity in the definition of eligible bonds or GDRs could lead to interpretational disputes.
• Interaction with DTAAs: While the law provides for DTAA override, practical challenges may arise in documentation, timing, and refund claims if excess TDS is deducted.
• Change in Rates: The transition from 10% to 12.5% for capital gains requires careful tracking of the date of transfer, and potential disputes may arise regarding the timing of accrual or realization.
• Characterization Issues: Distinguishing between interest, dividends, and capital gains can sometimes be complex, especially with hybrid instruments or structured products.

Conclusion

Clause 393(2)[Table S. No. 13 and 14] of the Income Tax Bill, 2025, represents a logical evolution and consolidation of the existing regime under Section 196C of the Income-tax Act, 1961. The provisions are substantively aligned, with the Bill updating terminology, clarifying exemptions, and codifying recent policy changes such as the increase in capital gains TDS rate. The structure ensures clarity, certainty, and ease of compliance for both foreign investors and Indian payers, while maintaining India's attractiveness as a destination for international capital. The explicit articulation of exemptions and the alignment with DTAAs further strengthen the legal framework. Going forward, continued modernization of compliance procedures and close coordination with international best practices will be essential to sustain and enhance the effectiveness of these provisions.

Full Text:

Clause 393 Tax to be deducted at source.