Understand How TDS Works on Foreign Payments

As an exporter, you receive many benefits from the government, which helps ensure foreign currency flows into the economy. The influx of foreign currency plays an essential role in the economy's health, which is why the government offers schemes to reduce GST on foreign remittances and many other schemes.

When you accept international payments to India related to your export business, the tax applicable depends on the transaction type and relevant tax laws. TDS is generally not applicable on export-related payments received in foreign exchange, but some transactions could be the exception. Since receiving payments in foreign currency is a sensitive process, RBI guidelines for inward remittance govern TDS on export payments.

Guidelines to manage TDS on export-related payments

As an exporter dealing with numerous regulatory authorities within and outside the country, saving on taxes within legally acceptable boundaries is vital. Here are some ways you can save on TDS.

Get payments for goods export

Unlike the export of services, exporting goods and getting paid for them does not attract TDS as per Indian Tax laws. However, you need to ensure proper export documentation is available. This will include the shipping documents, relevant invoices, customs clearances, and bank realization certificates (BRC).

Leverage the correct payment modes

Receiving your payments through the correct banking channels like SWIFT or wire transfer in foreign exchange will ensure that the entire transaction is legitimate and qualifies as an export transaction.

If applicable, treat services as exports

While exporting services, you can claim GST refunds by ensuring you meet the criteria listed under GST for zero-rated supply. You can get a Letter of Undertaking or LUT to avoid paying GST upfront.

Check for Double Taxation Avoidance Agreement (DTAA)

If your global buyer or importer deducts tax at source, checking the DTAA between the buyer’s country and India will help. You can submit a Tax Residency Certificate (TRC) and Form 10F to get an exemption or reduced TDS rates.

Submit a declaration for no deduction of TDS

Suppose you have an Indian buyer who deducts TDS on an export-related payment. In that case, you can clarify that exports do not incur TDS by submitting a declaration that starts the transaction nature.

File NIL or Lower TDS Deduction Certificate

When Indian entities deduct tax at source, you can apply to the Income Tax department for a NIL or lower tax deducted at source certificate.

How to manage TDS exceptions from the buyer’s side?

We had earlier stated that export-related payments are generally not subjected to tax deducted at source (TDS). However, if a foreign client or Indian intermediary deducts tax at source, here’s how to manage it.

Get a LUT or Letter of Undertaking for GST

When you export goods or services, apply for and get an LUT under GST so you do not have to pay GST upfront. This will indirectly help you avoid tax deductions on payments.

Leverage the FIRC or Foreign Inward Remittance Certificate

Negotiate with importers to ensure you get payments through proper banking channels where you can collect a Foreign inward remittance certificate (FIRC) to prove that your business has earned in foreign exchange. Doing this will help you apply for an exemption from TDS.

Refer to the Double Tax Avoidance Agreement (DTAA)

If the importer is from a country in a DTAA with India, you can inform them that withholding tax is unnecessary. Provide a Tax Residency Certificate to confirm you have an Indian Tax residency.

Leverage and file forms 15CA and 15CB if needed

If you are dealing with an intermediary in India, like your bank or PayPal, who insists on deducting tax at source, you can consult a Chartered Accountant and get them to issue a Form 15CB. Then, submit Form 15CA to the bank or intermediary to declare that the payment is not taxable.

Negotiate terms with customers

When you negotiate terms with the importer, ask them to pay the complete amount without deducting any tax at the source. Explain that export-related income is not subject to tax under Indian Taxation laws. If they disagree with this and want to deduct tax due to their country’s laws, claim tax credits under DTAA when you file your IT return.

We hope the above details clarify your doubts regarding tax deducted at source. When an exporter is dealing with regulatory matters like taxes, it is vital to streamline the process of inward remittance and document management. At LeRemitt, we help exporters do that with the help of our innovative solutions. Click here to learn more.