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

• Withholding Tax is paid as per Income Tax Act, 1961 which varies from country to country as per DTAA (Double Taxation Avoidance Agreement) between India and the lender’s country. There are 83 countries where India has DTAA. One of the condition to use DTAA rate is that lending institution should have an Indian Pan Card and Tax Residency Certificate.
• When foreign bank quote for Suppliers Credit they quote as net of withholding tax. Thus one needs to do grossing up ** of interest at the time of calculating WHT (example given below).
• 7.5% Withholding tax on Interest payment on funds arranged from Banks based out Mauritius. (Refer India Mauritius Double Taxation Avoidance Treaty: Page 9, Article 11 3(C))
• No Withholding tax on loans raised from overseas branch of Indian bank
• Non payment of WHT is punishable. Refer article “Consequence of Non Deduction of Withholding TAX“

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

• Revised Form 15CA Format
• Revised Form 15CB Format
• NOTIFICATION 67/2013 [SO 2659(E)] : Income-tax (Fourteenth Amendment) Rules, 2013 – Substitution of Rule 37BB and Form Nos. 15CA and 15CB Dated : 02-09-2013
• CBDT-Substitution of Rule 37BB and Form 15CA-15CB (Notification No 58/2013):Dated: 05-08-2013
• Income Tax Circular on Form 15CA and CB
• Procedure for furnishing information in Form 15CA and Form 15CB
• Online payment of  TDS of Withholding Tax under Challan 281 (nature of payment 195)
• Form No. 27Q : Format used to file return of withholding tax on quarterly basis
• India Mauritius Double Taxation Avoidance Agreement (DTAA)
• Country-wise Double Taxation Summary Chart
• Countrywise DDTA Agreements Copy
• Form A2
• Section 195
• Section 115A
• Section 194LC