One of the common questions faced by expatriates working in India is whether they can avoid withholding tax under the provisions of the Income Tax Act, 1961 particularly when a Double Taxation Avoidance Agreement (DTAA) may apply. While the law provides certain reliefs under treaties, the procedural clarity on claiming them at the stage of tax deduction at source (TDS) is still lacking.
Section 192 and Treaty Relief
Section 192 of the Income Tax Act, 1961, deals with the deduction of tax at source on salary payments. However, this section does not specifically provide for considering treaty reliefs such as those under a DTAA at the time of TDS on salary payments. As a result, employers are left with little to no guidance on whether or how such treaty benefits can be applied during monthly deductions.
Judicial Standpoint: The Microsoft Ruling
In a ruling by the Authority for Advance Rulings (AAR) in the case of Microsoft Corporation, it was held that stock option income provided to employees for services rendered in India qualifies as salary. Consequently, this income must be subject to tax deduction at source in India. This sets a precedent that income, even if structured differently, is considered taxable salary when linked to services performed in India.
CBDT Circulars and Practical Limitations
While the Central Board of Direct Taxes (CBDT) issues annual salary circulars to clarify an employer’s obligations under Section 192, these circulars do not discuss the possibility of claiming relief under Section 90 of the Act (relating to DTAA benefits) at the time of TDS on salary payments. This silence adds to the confusion and operational ambiguity for both employers and expatriates.
Reporting Constraints: Forms 16 and 12BA
Another area of concern is the reporting structure. Form 16 and Form 12BA (salary TDS certificates issued by employer) do not include any specific provision for showing treaty relief claimed at the TDS stage. The Supreme Court has previously held that the prescribed forms cannot be ignored when interpreting tax provisions. This interpretation could extend to Forms 16 and 12BA, which do not allow for inclusion of relief under Section 90 but do specifically provide for deductions under Chapter VI-A and relief under Section 89.
In summary, while the Income Tax Act, 1961 provides relief under tax treaties through Section 90, the procedural and reporting framework under Section 192 does not support the application of such relief at the withholding stage. Therefore, expatriates may have to claim treaty benefits while filing their income tax returns, rather than relying on TDS exemptions upfront.