Foreign exchange transactions generally mean transactions involving foreign currency such as imports, exports, remittances (either inward or outward), nonresident deposits, deposits and borrowings of residents in foreign currency, buying and selling foreign exchange or foreign currency etc.
The tax component of the transactions such as outward remittance on account of payment of interest or charges may result in `income' for the recipient and hence may attract the provisions of the Income Tax Act. The Act requires deduction and payment of tax in certain cases of foreign exchange transactions at the point of payment or at the time of credit of such income to the account of the payee itself like Tax Deducted at Source (TDS) and is generally referred to as Withholding Tax. This tax rate varies depending on the type of payment and the country of residence of the nonresident. Double Tax Avoidance Agreements have been signed by India with a large number of countries reducing the applicable tax rate for such remittances.
Sections 190 to 206 of the Income Tax Act deal with obligations in respect of withholding tax or tax deduction at source. In particular, as per section 195, any person responsible for paying to a nonresident, not being a company, or to a foreign company, any interest or any other sum that is chargeable under the provisions of this Act (not being income chargeable under the head Salaries) 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 prevailing. If, however, person responsible for making the payment is the government, public sector bank or public financial institutions, deduction is to be made at the time of payment. |
