CBDT Amends Income Tax Rule 26 to Ensure Accurate TDS on Foreign Currency Payments

New Telegraphic Transfer Buying Rate to be Used for TDS on Foreign Currency Payments

The Central Board of Direct Taxes (CBDT) has amended Income Tax Rule 26, which sets the rate of exchange for the calculation of the value in rupees of any income payable in foreign currency. The amendment, which comes into effect from the date of its publication in the Official Gazette, changes the rate of exchange from the “average market rate” to the “telegraphic transfer buying rate”.

The telegraphic transfer buying rate is the rate at which the State Bank of India (SBI) buys foreign currency through a telegraphic transfer. This is a more accurate measure of the value of foreign currency in India, and is therefore expected to result in a higher amount of tax being deducted at source on foreign currency payments.

The amendment applies to all income payable in foreign currency, including payments to:

• Assessees outside India
• Units located in an International Financial Services Centre (IFSC)
• Units located in an IFSC to assessees in India

The amendment is a welcome move, as it will ensure that the correct amount of tax is deducted at source on foreign currency payments. This will help to protect the interests of the Indian government and taxpayers.

Here are some of the key points to note about the amendment:

• The amendment applies to all income payable in foreign currency.
• The new rate of exchange is the telegraphic transfer buying rate.
• The amendment comes into effect from the date of its publication in the Official Gazette.

If you are a taxpayer who receives or makes payments in foreign currency, you should be aware of this amendment and ensure that you are deducting the correct amount of tax at source. You can find more information about the amendment on the website of the CBDT.

References:

1. Assessees Outside India: For individuals or entities outside India receiving income in foreign currency, this rule will be pertinent. The tax deduction at source will now be based on the telegraphic transfer buying rate on the date of deduction.
2. International Financial Services Centre (IFSC): This amendment extends to units located within an International Financial Services Centre. IFSCs are known for their special tax regimes, and this change will streamline the taxation process for such units, making it more transparent and standardized.
3. IFSC to Indian Assessees: Units in an IFSC paying income in foreign currency to entities or individuals in India will also adopt this new rate for tax deduction at source.

Key Definitions

To comprehend the notification thoroughly, it’s crucial to understand some key terms:

• International Financial Services Centre (IFSC): This term is defined as per clause (q) of section 2 of the Special Economic Zones Act, 2005. IFSCs are designated areas where financial services enjoy certain regulatory relaxations.
• Telegraphic Transfer Buying Rate: This is the rate adopted by the State Bank of India for buying a specific foreign currency, as determined by the guidelines provided by the Reserve Bank of India. It comes into play when that currency is made available to the bank through a telegraphic transfer.
• Unit: The meaning assigned to this term is as per clause (zc) of section 2 of the Special Economic Zones Act, 2005. It refers to units operating within Special Economic Zones, including IFSCs.

Implications and Benefits

This gazette notification carries several implications and benefits:

1. Clarity and Uniformity: The use of the telegraphic transfer buying rate ensures a uniform and clear method for determining the exchange rate, reducing ambiguity and disputes.
2. Streamlined Taxation for IFSCs: Units within IFSCs will find the new rules beneficial, as they bring a more organized and predictable approach to tax deduction at source.
3. Enhanced Compliance: The standardized approach fosters greater compliance with tax regulations and minimizes errors in tax calculations.
4. International Transactions: For individuals or entities dealing in foreign currency, this amendment simplifies tax calculations and aligns them with international financial practices.

Conclusion

The Income-tax (Seventeenth Amendment) Rules, 2023, represent a progressive step in the Indian taxation system. By introducing a specific method for calculating the value of income payable in foreign currency, these rules bring clarity, uniformity, and transparency to the taxation process. This move not only benefits businesses and individuals involved in international transactions but also reinforces India’s commitment to aligning its financial regulations with global standards.

The notification underscores the government’s commitment to modernizing and simplifying tax regulations, making them more accessible and comprehensible for all stakeholders. As we navigate an increasingly globalized economy, these rules are a timely and welcome change in the world of taxation.

FAQs About TDS on Foreign Currency Payments in India

1. What is TDS on foreign currency payments in India?
   TDS, or Tax Deducted at Source, on foreign currency payments is a mechanism through which tax is deducted by the payer while making payments to a non-resident individual or entity in foreign currency. It ensures that the government receives its due tax revenue from foreign payments made in India.
2. Who is responsible for deducting TDS on foreign currency payments?
   The person or entity making the payment to a non-resident, also known as the “payer,” is responsible for deducting and depositing the TDS with the Indian tax authorities.
3. What is the rate of TDS on foreign currency payments in India?
   The rate of TDS on foreign currency payments can vary depending on the nature of the payment. Common rates range from 5% to 20%, but it’s essential to refer to the specific provisions of the Income Tax Act or any Double Taxation Avoidance Agreement (DTAA) between India and the recipient’s country to determine the applicable rate.
4. Are there any exemptions or lower TDS rates available under DTAA?
   Yes, DTAA between India and the recipient’s country can provide for reduced TDS rates or exemptions. The taxpayer can take advantage of the beneficial provisions mentioned in the relevant DTAA, provided they fulfill the conditions specified therein.
5. What are the obligations of the payer regarding TDS on foreign currency payments?
   The payer is obligated to deduct TDS at the applicable rate before making the payment to the non-resident. They must also obtain a Tax Deduction and Collection Account Number (TAN) and issue a TDS certificate to the payee.
6. What is the due date for depositing TDS on foreign currency payments?
   TDS deducted on foreign currency payments should be deposited with the Indian tax authorities within seven days from the end of the month in which the deduction was made. For March, the deadline is April 30th.
7. Is there any requirement to file TDS returns for foreign currency payments?
   Yes, the payer is required to file quarterly TDS returns in Form 27Q for foreign currency payments. These returns must include details of TDS deductions made during the quarter.
8. What happens if TDS is not deducted or deposited on foreign currency payments?
   Failure to deduct or deposit TDS on foreign currency payments can lead to penalties and interest charges. The payer can be held liable for the unpaid tax along with interest and fines.
9. Can the non-resident claim a refund of excess TDS deducted?
   Yes, non-residents can claim a refund of excess TDS deducted by filing an income tax return in India. They can adjust the excess TDS against their final tax liability.
10. Are there any reporting requirements for foreign currency payments to non-residents?
    Yes, certain foreign currency payments to non-residents need to be reported to the Reserve Bank of India (RBI) through prescribed forms. Compliance with these reporting requirements is essential.
11. Where can I find more information on TDS on foreign currency payments in India?
    Detailed information on TDS on foreign currency payments can be found in the Income Tax Act, relevant DTAA provisions, and guidance provided by the Indian tax authorities. It’s advisable to consult a tax professional or the Income Tax Department’s official website for the latest updates and specific guidance.