E-circular dated June 20 th, 2015

Transcription

1 E-circular dated June 20 th, 2015 Integrated Association of Micro, Small & Medium Enterprises of India and Faridabad Small Industries Association C/o. FSIA Park, Opp. Plot No. 23, Sector 24, Faridabad , Haryana, India (Executive Secretary) Rajive Chawla Chairman, IamSMEofIndia President, FSIA Dear Members, Sangeet Kr Gupta Hon. Consultant, IamSMEofIndia & FSIA Important Change of Budget It is now effective w.e.f. 1 st June It will affect almost all businesses. It is procedural, but important. Filing of Form 15CA, made compulsory for all Payments Including Import of Goods Import of Machinery Import of anything, for which payment is being made Infact any payment, to any non resident. Both 15CA and 15CB are now required In this circular we analyse, the facts, the fiction, the confusions, and the solutions of those confusions, We also have some tips for the regular importers, to make life easy. It applies to payment for International Freight also. Any Import of Service.

2 Earlier, 15CA-15CB required only for TDS transactions Now, required for all transactions What does the law say regarding 15CA formality? Finance Act 2015 has amended the Section 195(6) of the Income Tax Act. It says,..in section 195 of the Income-tax Act, for sub-section (6), the following sub-section shall be substituted with effect from the 1st day of June, 2015, namely: (6) The person responsible for paying to a non-resident, (not being a company), or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.. IMSME Inference : In simple words, earlier if there was no TDS requirement, then there was no need of these formalities. Now, it is required in 100% of cases. What does the law say regarding PENALTY?

3 What does the law say regarding PENALTY? 73. After section 271H of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 2015, namely: 271-I. If a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information; or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.. IamSMEofIndia Inference : Entrepreneurs simply can t ignore this. The penalty is NOT per annum, it could be per transaction. So, if you have 100 import shipments, in an year, you may end up paying upto Rs One crore as penalty. Now, let us talk in Detail Question 1 : Banks have already started insisting on the certification and declaration reporting transactions in Form 15CA and Form 15CB. Should I file it? Answer : Yes, you must, there is no choice. Question 2 : Who should prepare Form 15CB, Bank or myself or my CA? Answer : You have to give all details to your CA, his team should check the facts, and then should give you the Form 15CB. Time required, from minutes to hours to days, in some typical cases of difference in opinions. You can help prepare the Form 15CB on the common stationery, to expedite the matter. Finally, the professional CA team does the certification after guiding you with pros and cons, of that case, if required. Yes, you can take this service from any practicing CA Firm, with whom you have comfort, for work, and comfort for involvement. (after all both of you may pay the penalty, of Rs 1 lakh, if proved wrong ) Question 3 : Who should prepare Form 15CA, Bank or myself or my CA? Answer : Usually, you / your accounts department must do it. If your volume is low, or you can work out this assignment with your CA firm, they might help you to do this E-filing. How much time it takes? If the Form 15CB is ready, it may take a few minutes, upto an hour including the usage of Digital Signature etc. Yes, you can take this service from any Friendly CA Firm, as said above.

4 What did the Budget 2015 memorandum say on this topic? The Finance Ministry was of the view there were two logics of 15CA-15CB formality. First, ensuring deduction of tax at the appropriate rate from taxable remittances. Second, identifying the remittances on which the tax was deductible but was not deducted at source And the Government realized usually, that the remitter does not provide the above information in respect of non-taxable remittances. Therefore, it is felt that obtaining of information only in respect of remittances which the remitter declared as taxable defeats one of the main principles of obtaining information in respect of foreign remittances i.e. to identify the taxable remittances on which tax was deductible but was not deducted. Thus, the above amendment is made in Section 195(6) What about this Tough penalty? ( facts behind it ) There was no provision for levying of penalty for non-submission/inaccurate submission of the prescribed information in respect of remittance to the non-resident. So people were taking is very lightly. For ensuring submission of accurate information in respect of remittance to a nonresident, a penal provision is incorporated in Section 271-I by the Finance Act, 2015 whereby a penalty of INR 1,00,000 would be levied for non-furnishing of information or furnishing of incorrect information under Section 195(6). Tip for the Regular Importers Law : You have to prepare this Form 15CA/Form15CB for every remittance. Problem : Increase in paper work Bigger problem : Running to get this done every day. And at that time your accounts department or director signatory, or CA could be busy. Solution : Advance Planning is better. Once in 15 days, accumulate all 15CA requirements, and prepare documents in one go. Get them Signed from Directors and CA s in One go. Hope, This will streamline your work, ( and reduce the running and tensions.)

5 Fundamental Question Is there any TDS on Import of Goods? First we see the Section 195 Section is the main section. For TDS on Non Residents, it says 195. (1) Any person responsible for paying to a non-resident, any interest..or any other sum chargeable under the provisions of this Act..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 : Inference : Hence it says, that if you are making a payment, and that income is chargeable to Income tax in India, then TDS has to be done. And the default rate for others category is 40% (unless it is covered in some lower rate ) Evidence : See page 66 on this link Note : It is not sayings that TDS is required only for Services. It simply says, any sum For seeing whether this sum is taxable, this we have to see Section 5(2) and Section 9(1) of the IT Act Section 5 Sec 5 is the charging section. For Non Residents, it says (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a nonresident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

6 Section 9 Sec 9 is the section defining the. Income Deemed to accrue in India, it says Sec 9(1) all income accruing or arising, whether directly or indirectly, through or from any business connection in India,. Explanation 1. For the purposes of this clause (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ; (b)..(not relevant) (c)..(not relevant) What is Business Connection? For example : If that Foreign company has a marketing office in India, and that transaction is connected to that office in India, then of course, it is a Business connection. What is NOT a Business Connection? Sec 9(1) Explanation 2 :.Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal nonresident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Inference : If ABC USA Ltd, has a Wholly owned subsidiary in India, then it is a Business Connection, but if it has a ordinary agent in Mumbai, who is doing independent business, for 5 other totally independent principals, then, it might not be a business connection for this purposes. But it is a Thin Line. Next Question : Business Income Taxable in India vs Tax Free India Is Export of Goods to India, a business income for that foreign company? Yes If this business Transaction with Indian company, is being done directly himself, or indirectly by a business connection, In India, then taxable in India? Yes If not, then? Then, no Tax in India.

7 Example of a NIL income tax, for import of Goods / Machines Example? You go to a Trade Fair in Germany or China, and finalise a deal for import of Machinery from there. Now, this vendor has no presence in India, at all. He simply packs and sends the machinery. In this case, all conditions are met, for NON TAXABILITY. This income tax is ZERO and also TDS is ZERO. ( Subject to conditions ) Example of a YES, TAXABLE to Indian income tax, for import of Goods / Machines Example? ABC USA Ltd has a semi permanent Branch office in New Delhi/Gurgaon. Its marketing team contacts you, get your order, and arrange a shipment from USA to your factory. Here, yes, that Foreign company must make a P and L account of its Indian Business, and pay taxes on the income accrued from Indian Operations. And TDS, is also applicable. How much, that will be seen as per standard rate or DTAA rate, whichever is lower What does DTAA say about this? Further, Section 90(2) of the Income Tax Act provides has an option to a non-resident to opt for the provisions of the Act or Double Tax Avoidance Agreement (DTAA), whichever is more beneficial to him. In most of the DTAAs that India entered into, the business income would be liable to tax in India only if such non-resident has any permanent establishment in India to which the transaction can be attributed. Further, Sec.90(4) mandates for tax residency certificate from the respective country to claim DTAA benefit and Sec.90(5) read with Rule 21AB(1) to (12A) requires Form 10F to be given by the non-resident to avail the DTAA benefits Any Cases / Judgements? Yes, some Supreme Court Judicial precedents on taxability of payments to non-resident for import of goods are present. You may see the internet for a) Vodafone International Holdings B.V. v. UOI (2012) 204 Taxman 408 (SC) b) GE Technology Cen (P) Ltd v. CIT (2010) 193 Taxman 234 (SC)

8 Guidelines, to Decide? ( a tentative Guide only ) You can conclude that the import of goods / Services is not liable to tax in India ONLY IF 1. The contract between the parties are on principal-to-principal basis and at arms length basis 2. Contracts to sell are made by the non-resident outside India, 3. Delivery of the goods are taken outside India on FOB basis, and 4. The non-resident exporter of goods does not have any business connection or permanent establishment in India. Now, it is clear that, one cannot simply assume that all imports are, as a matter of rule, exempt from tax There could be imports, which do not comply with the conditions mentioned above and therefore result in some income being chargeable to tax in India. Formalities required to decide TDS application Before Form 15CA 15CB Therefore, it would be advisable to adhere with the conditions specified above while entering into contracts of sale/ import transactions and to obtain the following documents from the foreign exporter/vendor 1. The contract of sale is entered on principal to principal at arms length with the non-resident signing the same outside India. 2. Tax Residency Certificate, 3. Form 10F signed by the vendor 4. A declaration from vendor stating he does not have a business connection or PE in India. Source of Form 10F :

9 Are there any Exemptions? Yes, Government has also given some exemptions for some personal payments, and some payments where already RBI Reporting / permissions are required under FEMA. Thus, as many as, 28 categories have been exempted from this reporting requirement. Some of these are Personal Donations, School / Hostel / Education Fees, Family gifts, Travel for Pilgrimage, Travel for Business, Airline Travel booking, Maintaining offices abroad, Equity Capital investments and some others. For details, you may see the notification at link below What could be the Intention of the Government? Some more Control on Black Money. Funds being sent out by MNC s and also Indians, without payment of taxes. Control on unreported incomes accruing from India, of Non-Residents Is there a similar provision in other Countries? Of Course, USA has similar laws. And there the TDS rate is 30% flat Where to get these Forms and Formats? You may access the to download the formats of Format of Form 10F Format of Tax Residency Certificate Format of Declaration regarding No Permanent Establishment in India For queries, suggestions and feedback, you can us Sangeet Kumar Gupta, FCA, DISA, ACMA, PGDMM, B.Com(Hons), Honorary Consultant, Integrated Association of Micro Small and Medium Enterprises of India and Faridabad Small Industries Association, , Camp Off : TB-06, 3 rd Floor, Crown Plaza, Sector-15A, Faridabad. FSIA Off : FSIA Park, Opp. Plot No.23, Sector- 24,Faridabad Subscription to our newsletters/ e-circulars Please send your details, and request to info@iamsmeofindia.com / skgupta[at]mlgassociates.org for Discontinuation of this To discontinue receipt of s from the author, please reply mentioning "Discontinue" in the Subject. Notes & disclaimer The contents of this circular are for Private circulation & intended for the addressee/s only. We do not warrant that this is free of mistakes, errors or any other defect. Care has been taken to provide authentic information, but it is advisable to confirm/verify with qualified legal practitioners, professionals before implementing any suggestions. The views expressed are not necessarily those of the Association. We encourage readers, our Members to write to us their opinions, suggestions, ideas, comments, thoughts and bring to our knowledge mistakes, omissions etc. which we d be pleased to correct/implement.

10 Above : A still from the Seminar on International Taxation, at Hotel Park Plaza, Faridabad. This was organised by I-am-SME-of-India, on 18 th June Attended by almost 100 CFO s, Business Owners and Accounts functionaries. If you missed this opportunity this time, do contact info@iamsmeofindia.com, for future invites. Our sponsors :