Introduction: Revision of Income Tax Rule 26
The Central Board of Direct Taxes (CBDT) has implemented a revision of Income Tax Rule 26, through Notification 64/2023 on Income-tax (Seventeenth Amendment) Rules 2023. The focus of this change looms over the exchange rate used for deduction of tax at source on income that is payable in foreign currency (forex).
Key Highlights: Scope and Definitions
– Tax Deduction Calculation: A pivotal change in the rule involves the calculation procedure for tax deduction at source (TDS) on foreign income. Herein, the telegraphic transfer buying rate as fixed on the date of tax deduction becomes the determinant metric.
– Applicability: The altered rule 26 outlines its scope to include payments made to an assessee residing outside India, to a Unit housed in an IFSC and those made by a Unit located in an IFSC to an assessee within India.
– Clarifications: Further clarity is provided on significant terms used in the rule:
– “International Financial Services Centre (IFSC)” draws its meaning from clause (q) in section 2 of the Special Economic Zones Act, 2005.
– The term “telegraphic transfer (TT) buying rate” specifies the exchange rate adopted by the State Bank of India for buying foreign currency, which is in alignment with the guidelines implemented by the Reserve Bank of India.
– The term “IFSC Unit” is defined under clause (zc) of section 2 of the Special Economic Zones Act, 2005.
CBDT Income Tax notification 64/2023 dated 17/08/2023: I-T Rule 26 Amended (Exchange Rate for TDS on Forex Payments)
Rule 26 Explained
To stay compliant with income tax rules, when handling foreign currency transactions, getting acquainted with the TDS provisions is crucial. As per Rule 26, TDS calculation for foreign currency payments requires conversion to Indian Rupees using the TT Buying Rate on the day of tax deduction. For high-value transactions, retaining a certificate of the exchange rate, issued by SBI, circumvents issues during tax assessment.
Conclusion: Significance of the Amendment
The amendment in Rule 26 brings about an increased precision in the calculation of tax deduction at source (TDS) on income payable in foreign currency. By relying on the telegraphic transfer buying rate on the specific date of tax deduction, a fair and accurate assessment of the involved values is ensured. The reform carries importance for monetary transactions with parties abroad and those occurring in connection with an IFSC.