Category Archives: Withholding Tax

Interest Payment to Mauritius: 7.5% Withholding Tax

In earlier article “WHT (Withholding Tax) on Interest on Buyers Credit” we had discussed that if buyers credit is arranged from Mauritius based bank / branches, there was no withholding tax on interest payment as per Double Taxation Avoidance Agreements (DTAA).

India-Mauritius Tax Treaty was amended on 10 May 2016 and got effective from 01 April 2017. In this article, only amendment related to Interest Payment  (Article 11) is covered.

The Protocol provides for a shifting of taxing rights to India on interest income earned by Mauritius-resident banks from debt-claims and loans made as from 1 April 2017. Currently, such interest income is exempted from tax in India. However, the withholding tax is limited to 7.5% of such interest income.

In addition, interest income of Mauritius-resident banks on debt claims or loans existing as at 31 March 2017 shall remain tax exempt in India, irrespective of the maturity date of such instruments.

In simple terms

  1. All buyers credit funded post 31 March 2017, 7.5% WHT will be applicable if funds are arranged from Mauritian Resident Bank.
  2. Provision is for Resident Bank. Thus, Indian Bank branches in Mauritius shall not be covered.

Which Banks will be Impacted

  1. All Mauritius based bank.
  2. Indian Bank Subsidiary
  • SBI (Mauritius) Ltd: 7.5% WHT applicable
  • BOB Mauritius (Branch): Not Applicable
  • Afraisia Bank: 7.5% WHT applicable
  • State Bank of Mauritius Ltd : 7.5% WHT applicable
  • HSBC Bank(Mauritius) Limited: 7.5% WHT applicable
  • The Hongkong and Shanghai Banking Corporation Limited:  ??? (need to check)
  • Standard Chartered Bank (Mauritius) Ltd : 7.5% WHT Applicable.

Importers

Henceforth if Buyers Credit is arranged from Mauritius based Bank, Importers will have to deduct Withholding Tax (WHT) as per above provision.

Reference:

  1. India – Mauritius DDTA and Amendments.
  2. Updates on India’s Tax Treaties With Mauritius and Its Impact on the India-Singapore Tax Treaty
  3. India-Mauritius Tax Treaty: An end and a New Beginning
  4. Protocol to the India-Mauritius Double Tax Treaty

Difference Between Sec 195 and Sec 194LC

Difference between sec 195 and sec 194lcIn earlier article 5% WHT as per Sec 194LC not applicable to Buyers Credit we had discussed on Sec 194LC. This article gives difference Between Sec 195 & Sec 194LC

 

Particular Sec 195 Sec 194LC
From Since Inception of Act July 2012
Upto June 2015
Applicable on Any payment business Money borrowed under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
Rate of TDS with availability of PAN Card As DTAA agreement. Incase of non DTAA 20%. Further details refer this link 5% and 3% Education Cess there on ( 2% Surcharge wherever applicable)
Who is responsible for tax deduction Resident or Non resident An Indian Company
Applicable If income is chargeable to tax in India in the hands of recipient If Interest is paid at approved rate

Revised Forms (15CA, 15CB) and Rules for payment to Non Resident

taxRefer Revised Article:

Form 15CA and Form 15CB not Required for Import Payments

Post below article CBDT has revised rules for form 15CA and Form 15CB. Please refer above article for further detail.

In earlier article about Withholding Tax (WHT), we have discussed about the process and applicability of Form 15CA and 15CB. On 5th August, 2013 CBDT revised the guidelines on Form 15CA and Form 15CB and further amended on 02nd September 2013. Below article gives a summary of changes made.

  • Revised Forms and Amendments shall come into force on the 1st October, 2013.
  • Applicable to : Any payment including any interest or salary or any other sum chargeable to tax, to non-resident, not being a company, or to a foreign company

Changes in New Form 15CA

Part A of Form 15 CA (Form 15CB not required)
Particulars Changes
Who Shall Fill It To be filled up if the remittance to non- resident or to a foreign company does not exceed Rs. 50000 per transaction and aggregate of such payments made during the financial year does not exceed Rs. 2,50,000
What information has to be filled 1. Particulars of Remitter, Remittee, Remittance made and TDS
2. Mandatory to furnish PAN of Remitter, if tax is deducted then TAN of the Remitter also needs to be provided
3. Form prescribes mandatory application of provisions of Section 206AA, if remittance is chargeable to tax and PAN of remittee is not available.
4. E-mail and Phone Number of remittee to be furnished, if available
Part B of Form 15 CA ***(Form 15CB required)
Who Shall Fill It To be filled up for remittances other those specified in Part A (If the Remittance is chargeable to tax and exceed Rs. 50000 per transaction and aggregate of such payments made during the financial year exceeds Rs. 2,50,000)
What information has to be filled 1. Forms prescribe mandatory application of provisions of Section 206AA, if PAN of remittee is not available;
2. Other Details
Secion A:
Details of Remitter, Remittee and Accountant to be specified in this section
Secion B:
Particulars of Remittance and TDS (as per certificate of accountant), namely:
a. Remittance details
b. Taxability under the Income Tax Act
c. Taxability under the relevant DTAA. Details of TRC (Tax Residency Certificate)
d. TDS details

*** Part B of Form 15CA is to be filled after obtaining either of the below

  • a certificate in form no. 15cb from an accountant (chartered accountant) or
  • a certificate from the Assessing Officer (AO) under Sec 197 or
  • an order from Assessing Officer under sub-sec (2) or sub-section (3) of sec 195

Changes in New Form 15CB(PDF) (Excel Format of  Revised Form 15CB)

Additional details to be provided in new Form 15CB are

  • Taxability under the Income-tax Act without considering the relief of the DTAA
  • If income is chargeable to tax in India and relief is claimed under the DTAA, whether TRC has been obtained from the recipient?
  • If remittance is on account of capital gains details of amount of short-term, long-term capital gains and the basis of arriving at the taxable income.

Revised Process for filing Form 15CA (atleast till the time NSDL site is update)

1. Login on the e-filing portal at the following link  – https://incometaxindiaefiling.gov.in/e-Filing/UserLogin/LoginHome.html

2.  Visit the link – e-file → Prepare and Submit Online Form(Other than ITR) → Select Form 15CA and Assessment year.

Form 15CA & Form 15CB not required for Import Payments

Few banks have started asking for Form 15CA and Form 15CB sighting RBI circular of 2007 “Remittances to non-residents – Deduction of tax at source

CBDT Circular clearly states ” Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or salary or any other sum chargeable to tax under the provision of the Act, shall furnish the following information” (in form 15CA and Form 15CB)

Payments made against Import Purchases constitutes Business Income of the Overseas Supplier and is taxable in India only if it is attributable to a Business connection/Permanent Establishment in India as per Section 9(1)(i) and respective Double Tax Avoidance Agreement. Thus, in absence of any income chargeable to tax in India there cannot be any application of Section 195 & form 15CA and Form 15CB is not applicable for remittances towards import payments.

Few banks are taking a declaration from Importers in their forwarding letter that given Import payment amount is non chargeable to tax in India and carrying out transaction without Form 15CA and Form 15CB.

Specified List :  

Explanation 2: For the removal of doubts, it is hereby clarified that for payments of the nature specified in column (3) of the specified list below, no information is required to be furnished under sub-rule (1).

Thus no form 15CA and Form 15CB in applicable for below cases.

Sl.No. Purpose code as per RBI Nature of payment
(1) (2) (3)
1 S0001 Indian investment abroad -in equity capital (shares)
2 S0002 Indian investment abroad -in debt securities
3 S0003 Indian investment abroad -in branches and wholly owned subsidiaries
4 S0004 Indian investment abroad -in subsidiaries and associates
5 S0005 Indian investment abroad -in real estate
6 S0011 Loans extended to Non-Residents
7 S0202 Payment- for operating expenses of Indian shipping companies operating abroad.
8 S0208 Operating expenses of Indian Airlines companies operating abroad
9 S0212 Booking of passages abroad -Airlines companies
10 S0301 Remittance towards business travel.
11 S0302 Travel under basic travel quota (BTQ)
12 S0303 Travel for pilgrimage
13 S0304 Travel for medical treatment
14 S0305 Travel for education (including fees, hostel expenses etc.)
15 S0401 Postal services
16 S0501 Construction of projects abroad by Indian companies including import of goods at project site
17 S0602 Freight insurance – relating to import and export of goods
18 S1011 Payments for maintenance of offices abroad
19 S1201 Maintenance of Indian embassies abroad
20 S1 202 Remittances by foreign embassies in India
21 S1301 Remittance by non-residents towards family maintenance and-savings
22 S1302 Remittance towards personal gifts and donations
23 S1303 Remittance towards donations to religious and charitable institutions abroad
24 S1304 Remittance towards grants and donations to other Governments and charitable institutions established by the Governments
25 S1305 Contributions or donations by the Government to international institutions
26 S1306 Remittance towards payment or refund of taxes.
27 S1501 Refunds or rebates or reduction in invoice value on account of exports
28 S1503 Payments by residents for international bidding

Reference

Tax Residency Certificate Not Required in Prescribed Format

CertificateIn September 2012, CBDT had prescribe a format in which Tax Residence Certificate (TRC) was required from April 2013. In the Amendments to Finance Bill 2013, requirement of prescribed format has been done away with. Below article gives further details on the same.

Sub-section (4) of 90 and 90A provides that treaty benefit will not be available to any Non Resident unless he furnishes TRC from the Government of his country of residence containing such particulars as may be prescribed. The Finance Bill, 2013 had proposed to insert sub-section (5) in sections 90 and 90A to provide that TRC shall be a necessary but not a sufficient condition for claiming any relief under a DTAA.

The Finance Minister had subsequently clarified, by way of Press Release dated 1st March 2013, that the TRC issued by the Government of a foreign country would be accepted as evidence of tax residency and the tax authorities cannot go behind the TRC to question the residential status.

In order to incorporate the said clarification in the statute, sub-section (4) of sections 90 and 90A is proposed to be amended to substitute the words “a certificate containing such particulars as may be prescribed of his being a resident” with the words “a certificate of his being a resident”. Therefore, a certificate issued by the Government of a foreign country would constitute proof of tax residency, without any further conditions regarding furnishing of prescribed particulars therein.

Also, sub-section (5) of sections 90 and 90A which provided that TRC shall be a necessary but not a sufficient condition for claiming any relief under a DTAA is proposed to be substituted to provide that the assessee referred to under sub-section (4) of sections 90 and 90A shall also provide such other documents and information, as may be prescribed.

Reference

  1. Amendments to Finance Bill 2013
  2. Sec 90 of Income Tax Act 1961
  3. Sec 90 A of Income Tax Act 1961
  4. Sec 90 (4) of Income Tax Act 1961
  5. Finance Bill, 2012 – Direct Taxes
  6. CBDT Circular on “Certificate of Tax  : Dated 17-09-2012
  7. India Mauritius Double Taxation Avoidance Agreement (DTAA)
  8. Country-wise Double Taxation Summary Chart
  9. Countrywise DDTA Agreements Copy
  10. Ministry of Finance Notification on 194LC (5% WHT – Not Applicable to Buyers Credit)Dated: 21-09-2012

Surcharge and Education Cess on Withholding Tax

taxEarlier articles have discussed about applicability of Withholding Tax on Interest payment in case of Buyers Credit and Suppliers Credit. Readers have come back asking query whether Surcharge and Education Cess is applicable or not on withholding tax amount. Below article answers these queries.

Is Surcharge and Education Cess Applicable on WHT ?

Yes. The basic gross rate of withholding tax on a foreign currency loan, availed by an Indian holding company from non-residents is 20% which, with applicable surcharge and education cess.

Incase of DTAA limits Surcharge and Education Cess

Withholding Tax rates may be limited by application of a tax treaty. The surcharge and education cess will not apply where the withholding tax is limited by a tax treaty.

Incase where DTAA is Silent on Surcharge and Education Cess

Incase where double taxation avoidance agreement does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source, there is an apparent conflict between the Income-Tax Act and DTAA between the two sovereign countries.  Thus one needs to refer Sec 90(2) of Income-Tax Act

“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent that are more beneficial to that assessee.”

In view of the above, in respect of a taxpayer to whom the double taxation avoidance agreement applies, the provisions of the Indian Income-tax Act shall apply to the extent they are more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Incase where DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source,  taxpayer can take advantage of that provision in the DTAA for deduction of tax.

Reference

Withholding Tax (WHT) on Suppliers Credit Transactions

In earlier article we had discussed about WHT on Buyers credit. This article answers questions related to withholding tax on suppliers credit.

What is Suppliers Credit ?

Supplier’s Credit is a structure of financing import into India. In this structure, overseas suppliers or financial institutions outside India offer financing to importer on Libor linked rates against usance letter of credit (LC).

Is WHT applicable on Suppliers Credit Transactions ?

Yes it is applicable.

How to Compute Withholding Tax (Example)

  • WHT Rate: Assume 10%
  • Transaction Amount: $100000
  • Quote :  Libor+ 100 bps +  WHT  (Libor : 1%, Margin: 1% (net of WHT) Tenure: 180 days
  • USD / INR:  65
  • Net Interest Amount  is $ 1000 {$1,00,000*2%*(180/360)}
  • Gross Interest Amount = $1111 = {$1000* (100/90)}
  • Withholding tax = $ 111 = Rs. 7215
  • Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

Process flow of payment of Withholding Tax

  1. Check from tax residency certificate and Indian Pan Card from Overseas Bank or Suppliers depending who is funding transaction.
  2. Check if India has DTAA with Tax resident country.
  3. If answer question 2 is yes, check for TDS rates as per  Countrywise double taxation summary chart.
  4. Compute TDS amount.
  5. Deposit the tax through challan no. 281 (Nature of payment 195).
  6. Get Form 15CB issued from Chartered Accountant (CA) for the suppliers credit interest payment.
  7. Submit online Form 15CA based on details in form 15CB provided by CA.
  8. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for suppliers credit interest.
  9. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
  10. AD Bank forwards a copy of document to Assessing Officer / Income Tax Department.

Note: 

  1. If DTAA & PAN of suppliers credit providing bank is available, then as per DTAA .
  2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
  3. As per DTAA, rate of TDS should not exceed tax rate given in DTAA. Which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.

What points should Importer take care

Legal Answer on Why WHT is applicable on Suppliers Credit

Mumbai bench of the Income-tax Appellate Tribunal in the case of Uniflex Cables (Ltd) held that payment made to a foreign supplier towards finance charges for availing credit for purchase of raw material is in the nature of “Interest” under Section 2 (28A) of the Income Tax Act, 1961. Thus any payment made to overseas supplier or financial institution for such payment attracts WHT under Section 195.

Interest within the meaning of Sec.2(28A) of the Act. Sec.2(28A) of the Act was introduced by the Finance Act, 1976, w.e.f 1-4-1976 and it reads as under: “(28A) “Interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;”

  1. The Tribunal relied on the Gujarat High Court’s decision in the case of Vijay Ship Breaking Corporation where it was held that the non-resident is taxable under the Act in respect of usance interest and the same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act.
  2. Additionally, DTAA for the country in question needs to be referred. If the sum in question is treated as interest under the Act, whether the same is liable to tax in India in view of the DTAA between India and the countries of which the persons who supplied raw material to the assesse were tax residents. Reason The provisions of the Agreement will override the provisions of the Act.”  (Ref: Countrywise DDTA Agreements Copy)

Reference: 

  1. Uniflex Cables Ltd v. DCIT [I.T.A. No.7019/Mum/2006]
  2. CIT v. Vijay Ship Breaking Corpn [2003] 261 ITR 113 (Guj)
  3. Vijay Ship Breaking Corporation v. DCIT [2003] 86 ITD 497 (Rajkot)
  4. Transmission Corporation of A.P. Ltd v. CIT [1999] 239 ITR 587 (SC)
  5. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP)

CBDT Circular

  • Circular No 65 dated 02 September 1971
  • Circular No 647 dated 22 March 1992

Important Related Links

5% WHT as per Sec 194LC not applicable to Buyers Credit

Provisions of newly inserted Section 194 LC for Tax Deduction by Indian Specified Company on Interest paid to Non resident / Foreign Company is not applicable to Buyers Credit.

Summary of Provision

  • For money borrowed during: July 1, 2012 – June 30, 2015.
  • Withholding Tax (WHT) at 5% instead of 20% (plus applicable surcharge and education cess).
  • Under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
  • Loan should be in  Foreign Currency (Definition as per FEMA Act 1999, Sec 2 (m) “foreign currency” means any currency other than Indian currency)
  • By Specified Company was defined in original Finance Bill 2012 as infrastructure firm but the same was amended to any Indian Company.
  • Interest Rate as per approved rate by Central Government (RBI Master Circular on External Commercial Borrowing and Trade Credit. AAR Ruling which states that RBI approval to be consider as Central Government approval)
  • Indian Company is responsible for Tax deduction

Ministry of Finance Notification (Dated: 21-09-2012)

Over and above the above details, Ministry of Finance notification also clarifies below point.

With a view to lower the compliance burden and reduce the time lag which would arise on account of case-by-case approval, the Central Government has decided to grant approval to all borrowings by way of loan agreement and long-term infrastructure bonds that satisfy certain conditions. No specific approval in such cases would be required. Broadly, borrowings under a loan agreement or by way of issue of long-term infrastructure bonds that comply with External Commercial Borrowings (ECB) regulations as administered by the Reserve Bank of India (RBI) would be eligible for availing of the benefit of this concessional tax regime. Further, in case of long-term infrastructure bonds the end use of the proceeds of such bond issue should be for the infrastructure sector as defined by RBI under its ECB regulations. The details of the conditions to be satisfied are elaborated in the circular on approval of loan agreements/ long-term infrastructure bonds under Section 194 LC of Income Tax Act, dated 21/09/12 issued by the Central Board of Direct Taxes (CBDT).

CBDT Circular (Clarification on Loan Agreement. Dated 21-09-2012)

  1. The borrowing of money should be under a loan agreement.
  2. The monies borrowed under the loan agreement by the Indian company should comply with clause (d) of sub section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA3/2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (hereafter referred to as “ECB regulations”), either under the automatic route or under the approval route.
  3. The borrowing company should have obtained a Loan Registration Number (LRN) issued by the Reserve Bank of India (RBI) in respect of the Agreement.
  4. No part of the borrowing has taken place under the said agreement before 1st July, 2012.
  5. The agreement should not be restructuring of an existing agreement for borrowing in foreign currency solely for taking benefit of reduced withholding tax rates.
  6. The end use of the funds and other conditions as laid out by the RBI under ECB regulations should be followed during the entire term of the loan agreement under which the borrowing has been made.

Reasons why non applicability to Buyers Credit:

To avail benefit under above section, either there has to be loan agreement and neither satisfy conditions layed down in CBDT Circular. Thus, in case of buyers credit Sec 194LC is  not applicable.

Applicable Sections: 

References

Form 15CA & 15CB Not Applicable on Interest payment to Indian Bank Branches

As per Income Tax circular 04/2009 dated 29th June, 2009 (Circular Link provided below), Form 15CA and 15CB Certificate under Section 195 of Income Tax is required to be submitted in cases where payments are made to a non-resident.

Residential status of a Company as defined u/s 6 (3) of Income Tax Act:

An Indian Company is always resident in India. A foreign company is resident in India only if, during the previous year, the control and management of its affairs are situated wholly in India. However, a foreign company is treated as non resident if, during the previous year, the control and management of its affairs are either wholly or partly situated out of India. The term “control and management” refers to “head and brain” which directs the affairs of policy, finance, disposal of profit and vital things concerning the management of a company. Usually control and management of a company’s affairs is situated at the place where meetings of its board of directors are held.

Deduction of tax at source from interest other than interest on securities u/s 194A of Income Tax Act in made in cases where payments are made to a resident:

Any person who is responsible of paying to a resident any income by way of interest, other than interest on securities, is required to deduct income-tax thereon at the rates in force.

However provisions of this section is not applicable where interest is credited or paid to any banking company, co-operative society engaged in banking business, public financial institutions, or notified institutions.

Based on above definitions, Indian Bank overseas branches becomes a resident and hence, whenever buyer’s credit interest payment is made to Indian bank overseas branches no TDS needs to be deducted and hence, form 15 CA and 15 CB is not required to be submitted.

For further details you can refer below articles

Consequence of Non Deduction of Withholding Tax (WHT / TDS)

As with other TDS defaults the consequences for Non deduction of Withholding Tax (WHT) may be broadly classified as under:

  1. Disallowance of the amounts paid under Section 40 (a) (i). It should be noted that the scope of the section dealing with payments to non residents is wider than that of 40 (a) (ia) which deals with residents.
  2. Simple Interest at 12 % p.a.  u/s 201A (which is on a month to month basis after the Finance Act 2007). As per amendment w.e.f. July 1, 2010, the rate of Interest is 1 % per month or part thereof, from the date on which tax was deductible to the date on which tax is actually deducted. The rate of Interest is 1.5 % per month or part thereof, from the date on which tax was actually deducted to the date on which tax is actually paid.
  3. Penalties for non deduction (u/s 271C) (Minimum Penalty is the amount of tax which such person has failed to deduct or pay) and failure to pay the deducted tax to the government (u/s 221) (Minimum Penalty is any such amount as the Assessing Officer may impose and maximum Penalty amount is equal to tax not deducted or paid)
  4. Prosecution u/s 276B

Note:  Section 195 A provides for the grossing up of payments in case of Net of Tax Payments.

Buyer’s Credit from Mauritius Based Foreign Bank

Since last week or so, Foreign bank branches based out of Mauritius are either not able to quote or are quoting above the RBI prescribed ceiling for 6 months LIBOR + 200 bps.

Reason being, low liquidity has resulted into high cost of funds.

Above will affect those importers who used to arrange funds from Mauritius based Foreign Bank which were somewhat cheaper than Indian Bank overseas branches but did not want to get into withholding tax. As per Double Taxation Treaty with Mauritius, withholding tax on interest payment to Financial Institution is nil.

Now options with them are either to take funds from Indian bank overseas branches at higher cost or from Foreign bank and pay withholding tax on due date.

WHT (Withholding Tax) on interest on Buyers Credit

What is WHT (Withholding Tax) ?

WHT tax

Under Sec 195 of Income Tax Act 1961, Tax is required to be deducted on the interest amount paid by the Indian corporate to overseas lenders (bank / suppliers) on the loans taken.

Why is it a deterrent ?

Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower

Impact on Importers ?

Process flow of payment of Withholding Tax

  1. First check the country from which buyer’s credit is to be made available to finalize rate of TDS (Refer link: countrywise double taxation summary chart ).
  2. Deposit the tax through challan no. 281 (nature of payment 195).
  3. Get Form 15CB issued from Chartered Accountant (CA) for the buyers credit interest payment.
  4. Submit online Form 15CA based using form 15CB provided by CA.
  5. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for buyers credit interest.
  6. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
  7. AD Bank forwards a copy of document to Assessing officer / Income Tax Department.

Note: 

  1. If DTAA & PAN of buyers credit providing bank is available, then as per DTAA .
  2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
  3. Withholding Tax rates may be limited by Application of a tax treaty. The surcharge and education cess will not apply where the withholding tax rate is limited by a tax treaty.

Important Related Links

Example

For example: Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bonafide banking or financing business.

To explain you mathematically:

Buyers Credit Foreign Bank :  If WHT is 10% than,

BC Amount: $100000, Libor: 1%, Margin: 1% (net of WHT) , Tenure: 180 days, USD / INR:  50

Net Interest Amount = $ 1000 ($100000*2%*(180/360)

Gross Interest Amount = $1111 ($1000* (100/90)

Withholding tax = $ 111 = Rs. 5550

Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

* Note: Above content is collected from various sources. Request to consult a tax expert before using the same.

** As per Income Tax Act 1961: Sec 195A. [In a case other than that referred to in sub-section (1A) of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, 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.]