Buying from a foreign website? Taxman is watching you!

Domestic I-T laws require you to deduct tax on software, e-books and music albums; must report every such transactions while filing returns.

You pay Rs 250 to purchase your favourite artist's album from his or her website and save it on your device.

According to new taxation laws, you will need to deduct a withholding tax on it. The amount that needs to be deducted is in itself a complex computation.

The person will need to refer to the procedure mentioned in the Income Tax Act (chapter XVIIB) or 20 per cent of the amount paid, whichever is higher. To calculate the liability, you will also need to consider if India has any taxation agreement with the country called as Double Taxation Avoidance Agreement.

“The laws say a company or a person making royalty payment made to a non-resident Indian needs to deduct tax during the transaction,” says Gautam Nayak, partner, CNK & Associates.

According to him, this means if a person or a business purchases a software, music album, an e-book, a computer game from a foreign website, he or she will need to deduct the relevant tax. This is because the artist, the author and the company has a copyright on the product.

To complicate the matters further, the new rules also require individuals as well as businesses to report every transaction they make with a non-resident person or entity.

This means, if you purchase from Apple App Store, iTunes, Amazon’s global websites, or on eBay Global EasyBuy, you will need to tell the tax authority on each and every transaction done, irrespective of the amount, while filing you returns.

And if you don't follow the laid down procedures, the assessing officer can slap a penalty of Rs 1 lakh for non-compliance.

If you are wondering how to determine if the payment was made directly to the company abroad or if it was routed through the Indian entity, tax experts say the person should refer to their bank and credit card statements. These clearly show if the transaction was domestic or international. 

The amendment is part of the section 195(6) of the Income Tax Act. Vishweshwar Mudigonda, partner, Deloitte Haskins & Sells, said while the section was changed, the rule (37BB), which covers the specifics of the section is still old and so are the forms (15 CA and 15CB) in which details need to be filled up.

Earlier, individuals and businesses were only required to report if the single transaction was above Rs 50,000 or payment to one person/entity crosses Rs 2.5 lakh a year. 

“This has created a lot of confusion. Even if some decides to follow the law, he or she can’t do it as there are no provisions made of it,” says Mudigonda. He added thankfully the government has not tinkered with the exempted transactions in the last Budget.

Any payments made for medical emergencies, donations, gifts, business-related travel, and so on remain exempted. 

While tax experts called the amendments ‘impractical’ and illogical’, all of them said they were hoping that the Central Board of Direct Taxation will clarity the issue because even if someone decides to follow the law, he or she might not be able to do it unless the government brings about changes to the rule and forms.

Their advice to taxpayers: wait and watch.