Analysis of Budget 2023- Certain sections related withholding taxes and Transfer Pricing
Context & Statutory Background: Chapter XVIII of the Income Tax Act, 1961
Chapter XVIII of the Income Tax Act 1961 (‘the Act’) deals with various provisions related to Tax Deduction at source. Over the period, the scope of these provisions has been expanded to include transactions from multiple sources or origin. The person who has suffered tax while receiving or accepting income or payment will be entitled to credit at the time of filing Income Tax Return on the basis of information available in Form 26AS and Annual Information Statement. The Finance Bill, 2023 has made proposals to amend provisions the Act relating to TDS and TCS. The proposals are dealt with in this article.
Winning from online games (Section 194BA)
Section 194BA widens the scope of tax deduction at source on the transaction involving online gaming intermediaries who are offering one or more games on internet, and which is accessible by the user through a computer resource including any telecommunication device, to the user. The tax shall be deducted on the net winnings paid in wholly in kind or cash or as well as on the remaining amount of net winnings in the user account, computed in the manner as may be prescribed, at the end of the financial year 30% as increased by surcharge and cess as applicable.
Section 194BA starts with a non obstante clause which will override the other provisions of the Act. This section will not only provide certainty in terms of tax deduction but also seeks to identify to online gaming companies from a taxation point of view.
Key Architectural Features of Section 194BA:
Payment of certain amounts in cash (Section 194N)
Section 194N requires banking Company, cooperative society engaged in banking business or post office to deduct tax at source at 2% on payments in cash exceeding one crore rupees. The said limit is proposed to be increased to three crore rupees from one crore rupees where the recipient is a cooperative society. Those cooperatives who primarily work in rural area and have low-income groups as their members will benefit from this provision.
Extending scope of tax deduction at source (Section 197)
Scope of section 197, lower or nil withholding tax application to the jurisdictional office, has been expanded to include payments where deduction may be required to be reduced due to some exemption, for example exemption under section 10(23FE) of the Act allowed to notified Sovereign Wealth Funds and Pension Funds. Hitherto, section 194LBA required business trusts to deduct tax at source at the rate of 5% on interest income of the non-resident unit holders. This will benefit business trust unit holders who are eligible for exemption under section 10(23FE) of the Act.
Business trusts (REITs / InvITs) were obligated to mandatorily deduct TDS @ 5% on interest distributions paid to non-resident unit holders without any statutory window for lower/nil withholding certificate u/s 197.
Eligible institutional non-resident unit holders enjoying tax exemption u/s 10(23FE) (notified Sovereign Wealth Funds and Pension Funds) can now apply for and obtain lower/nil withholding tax certificates from the Assessing Officer.
Removal of exemption from TDS on payment of interest on listed debentures to a resident (Section 193)
As per clause (ix) to the proviso to section 193 of the Act, no tax was deductible in the case of any interest payable on any security issued by a company, where such security is in dematerialized form and is listed on a recognized stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (32 of 1956) and the rules made thereunder. Clause (ix) of the proviso to section 193 provides for the exemption from tax deduction on interest on listed debentures issued to the resident investors. Now it is proposed to omit clause (ix) of the proviso to section 193 and hence tax will be deductible on interest on listed debentures.
Tax treaty relief at the time of TDS under section 196A of the Act
Section 196A of the Act provides for TDS on payment of certain income to a non-resident (not being a company) or to a foreign company, at the rate of 20%. The income is required to be in respect of units of a Mutual Fund specified under clause (23D) of section 10 of the Act or from the specified company referred to in the Explanation to clause (35) of section 10 of the Act.
Based on the representations received now it is proposed to provide option to choose tax rate as per tax treaty or 20% whichever is lower provided the payee to whom such tax treaty applies has provided tax residency certificate to the payer. Now non resident investors who are in receipt of dividend from mutual funds can seek tax treaty benefit at the time of deduction of tax at source. This brings section 196A at par with section 195 when it comes to tax treaty benefit.
TDS on payment of accumulated balance due to an employee (Section 192A)
Section 192A of the Act provides for TDS on payment of accumulated balance due to an employee under the Employees’ Provident Fund Scheme, 1952. The existing provisions of section 192A of the Act, inter-alia, provide for deduction of tax at the rate of 10% of the taxable component of the lump sum payment due to an employee or at maximum marginal rate (‘MMR’) in case the payee does not have a PAN.
Now it is proposed to omit the second proviso to section 192A which provides for tax deduction at source at MMR. This brings section 192A at par with the other sections where in case of non-availability of PAN tax is deducted at 20% under section 206AA of the Act.
Relief from special provision for higher rate of TDS/TCS for non-filers of income-tax returns
Section 206AB and 206CCA provides for higher tax rate for TDS and TCS respectively in case of specified persons. Higher rate can be as high as twice the rate of tax applicable under the section or rates in force. This section does not apply to payments under section 192, 192A, 194B, 194BB, 194IA, 194IB, 194LBC, 194M or 194N of the Act.
These sections define “Specified person to mean a person who has not furnished the return of income for the assessment year relevant to the previous year immediately preceding the financial year in which tax is required to be deducted or collected (as the case may be)-
- (i) for which the time limit for furnishing the return of income under sub-section (1) of section 139 has expired; and
- (ii) the aggregate of tax deducted at source and tax collected at source in his case is rupees fifty thousand or more in the said previous year.
Now it is proposed to provide relief to certain persons who are not required to furnish the return of income for the assessment year relevant to the said previous year and who is notified by the Central Government in the Official Gazette in this behalf.
Comprehensive Overview of Withholding Tax Amendments (Finance Bill, 2023)
| Section | Nature of Payment | Pre-Amendment Position | Proposed Amendment | Statutory Objective & Impact |
|---|---|---|---|---|
| 194BA | Winnings from online games | Governed generally u/s 194B with ₹10,000 threshold per transaction | Dedicated regime with non-obstante clause; 30% TDS on net winnings at withdrawal/year-end | Tax certainty and bringing online gaming platforms into formal compliance framework |
| 194N | Cash withdrawal by Co-operative Societies | 2% TDS on cash withdrawals exceeding ₹1 Crore | Threshold enhanced to ₹3 Crores for co-operative societies | Substantial liquidity relief to rural, agricultural, and credit cooperatives |
| 197 | Lower / Nil withholding certificate | Did not explicitly cover payments subject to section 10(23FE) exemptions u/s 194LBA | Scope widened to allow nil/lower TDS certificates on income covered u/s 10(23FE) | Protects cash flow of notified Sovereign Wealth Funds & Pension Funds investing in trusts |
| 193 | Interest on listed demat debentures to residents | Exempt from TDS under clause (ix) of proviso to section 193 | Clause (ix) of proviso omitted; TDS now mandatory | Plugs reporting gaps and prevents under-reporting of debenture interest |
| 196A | Income from Mutual Funds paid to non-residents | Flat 20% withholding rate without direct treaty benefit at source | Option to apply DTAA treaty rate or 20%, whichever is lower, upon providing TRC | Brings section 196A on par with section 195; eliminates refund-seeking delays |
| 192A | EPF premature withdrawal without PAN | TDS at Maximum Marginal Rate (MMR) (~39%–42.74%) if PAN not furnished | Second proviso omitted; tax deducted at standard 20% u/s 206AA | Substantial relief to low-income employees withdrawing accumulated PF |
| 206AB & 206CCA | Higher TDS/TCS rates for non-filers | Higher rate applied broadly to all specified non-filers with TDS/TCS ≥ ₹50,000 | Exemption carved out for persons not required to file ITR and notified by Central Govt | Prevents unintended punitive withholding on legitimately exempt categories |
Transfer Pricing Proposals in Finance Bill, 2023
The budget has provided for only two changes in the provisions related to transfer pricing in the Act.
1. Introduction of concessional tax regime to promote new manufacturing co-operative society (Section 115BAE)
The Taxation Laws (Amendment) Act, 2019, inter-alia, inserted section 115BAB in the Act which provides that new manufacturing domestic companies set up on or after 01.10.2019, which commence manufacturing or production by 31.03.2023 and do not avail of any specified incentive or deductions, may opt to pay tax at a concessional rate of 15 per cent. Time limit to commence manufacturing or production is extended upto 31.03.2024. However, no concessional tax rate was provided for any other entity except a domestic company engaged into manufacturing. To provide a level playing field between new manufacturing co-operative societies and new manufacturing companies, 15% concessional tax rate benefit is proposed to be extended to the new manufacturing co-operative societies as well by inserting a new section 115BAE.
The section 115BAE also provides that if any transactions with the co-operative society eligible for concessional tax rate are arranged in a such a manner which produces more than ordinary profits involving specified domestic transactions referred to in section 92BA of the Act, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F. In other words, new cooperative societies claiming concessional tax rate regime under section 115BAE will have to maintain transfer pricing documentation as mentioned in Rule 10D if they have transactions with any person which may produce more than ordinary profits. Typically, this provision would be invoked in case of transactions between related parties in which one of the parties is eligible for concessional tax rate or exemption under the special provisions of the Act.
- Profits exceeding ordinary commercial margins will be recomputed having regard to the Arm’s Length Price (ALP) under section 92F(ii).
- Eligible co-operatives must mandatorily maintain detailed Rule 10D transfer pricing documentation and obtain an accountant’s report in Form 3CEB.
2. Reducing the time provided for furnishing TP report (Section 92D(3) & Rule 10D)
Section 92D of the Act, inter-alia, provides that every person who has entered an international transaction or a specified domestic transaction shall keep and maintain the information and documents as provided under rule 10D of the Income-tax Rules, 1962 (the Rules).
Further, as per sub-section (3) of section 92D of the Act, the Assessing Officer (AOs) or the Commissioner (Appeals) may during any proceedings under the Act require such person to furnish any information or document, as provided under rule 10D of the Rules, within a period of 30 days from the date of receipt of a notice issued in this regard. It has been further provided that on an application made by the assessee the time of 30 days may be extended by an additional period of 30 days.
It is proposed now to reduce the time period for submission of any information or document, as provided in Rule 10D of the Rules (Transfer Pricing Study report), from 30 days to 10 days from the date of receipt of notice. Now, the person who is required to keep and maintain documentation under Rule 10D for domestic and international transactions must keep transfer pricing benchmarking study report ready as the time provided to submit the information/document is now reduced to 10 days only.
Actionable Compliance Takeaways for Chartered Accountants & Corporate Taxpayers
- Immediate Preparation of Transfer Pricing Study (Rule 10D): Taxpayers with international transactions or specified domestic transactions can no longer adopt a reactive approach. With the notice response window shrunk to 10 days, contemporaneous documentation must be finalized before the due date of Form 3CEB.
- Procurement of Tax Residency Certificates (TRC) u/s 196A: Non-resident investors seeking treaty benefit on mutual fund distributions must submit a valid TRC and Form 10F in advance to allow payers to withhold at treaty rates (typically 10%–15%) instead of the statutory 20%.
- Audit and Review of Listed Debenture Interest (Section 193): Finance and treasury departments of issuing companies must establish automated TDS deduction workflows on demat listed debentures following the deletion of clause (ix).
- Cash Withdrawal Management for Co-operatives (Section 194N): Primary agricultural and rural credit cooperatives should coordinate with their principal bankers to adjust their annual cash withdrawal ceilings from ₹1 Crore to ₹3 Crores without attracting 2% withholding.
- Rationalisation of EPF Payouts (Section 192A): PF trust administrators and EPFO offices must update their withholding systems to limit TDS to 20% u/s 206AA when PAN is not provided, eliminating the penal MMR deduction.