Income tax filing: Remitting money abroad? Taxman scanning certificates, here is what you must do

The government earlier this year introduced a new penalty provision in income tax laws, providing that every CA, merchant banker or registered valuer issuing any incorrect certificate/ report under income tax laws may be liable for penalty of Rs 10,000 for every such incorrect report/ certificate.

Foreign remittances and NIL tax certificates issued by CAs

While a CA is required to furnish various types of certificates/ reports under income tax laws, such as certificate regarding arm’s length price of international transactions under transfer pricing provisions, tax audit report under tax audit provisions, one very important and most commonly used certificate is NIL tax withholding certificate issued by a CA on foreign remittances made by any person outside India.

Under provisions of income tax laws, every person who is required to make any payment to a non-resident outside India, is required to deduct appropriate TDS on such payment, which is equal to final income tax liability of such non-resident in respect of such transaction. If a person believes that any such payment is not subject to TDS, an application is required to be made to jurisdictional tax officer to issue an order/ certificate allowing such payment to be made without deduction of TDS.

Given the large number of foreign remittances, limitation of resources of the tax department and with the aim of reducing hardship of the common man, the government has prescribed an alternative route, authorising a CA to issue a certificate of NIL or lower TDS, in case the payer does not intend to obtain an order from tax authorities.

However, this authorisation comes with great responsibility, as once payment is remitted outside India without deduction of tax, there is a greater possibility that such transaction would not get caught in the income tax net even if such transaction is liable to income tax in India. In some instances where certificates were issued for NIL deduction of TDS, such transaction was found to be taxable in India subsequently.

The international taxation wing of the Income tax department has been closely examining NIL TDS certificate issued by CAs and seeking clarifications from taxpayers in respect of these transactions. Notices are being issued to taxpayers to provide details of and justify payments made by them to foreign parties on the basis of Form 15CA (a declaration by taxpayer) and Form15CB (i.e. ,CA certificate) without TDS. In many cases, tax demands are also being raised on such taxpayers.

In many cases, such demands are due to difference of opinion between taxpayers and tax authorities regarding taxability of transactions and issues involving interpretation of law such as taxation of royalty or fees for technical services, taxability of capital gains in a tax treaty scenario, etc.

However, many a time this results in tax demands being raised by tax authorities against Indian payers even 2-3 years after the transaction has taken place, while no recovery can be made from corresponding non-resident payee.

In these circumstances, it may be advisable for Indian payers to approach Indian tax authorities and obtain a NIL tax withholding order, instead of making remittance against a CA certificate, to avoid any future tax liability being raised against them, especially in relation to transactions which involve complex tax issues involving different interpretation of income tax provisions and tax treaties. Of course, even in such cases, CAs can be helpful as advisors or representatives before tax authorities for obtaining such NIL/ lower tax orders.

Shailesh Kumar
The author is director, Direct Taxation, Nangia & Co LLP