Clause 43 and Part-D of Form 145: Hidden Risks in Reporting Non-Taxable Foreign Remittances
With effect from Tax Year 2026-27, a significant compliance change has been introduced in the tax audit regime. The insertion of Clause 43 in Tax Audit Form No. 26 has fundamentally altered how foreign remittances reported in Part-D of Form 145 will be viewed and examined by the tax administration.
What appears to be a routine disclosure requirement can, in practice, become a trigger for in-depth scrutiny if even a single remittance is wrongly classified as not chargeable to tax. Businesses and professionals must now reassess their approach to reporting remittances to non-residents, especially those claimed as non-taxable under the Income Tax Act 1961 and relevant Double Tax Avoidance Agreements (DTAAs).
Regulatory Framework: Rule 220(2) and Form 145
Statutory Requirement Under Rule 220(2)
Under Rule 220(2) of the Income Tax Rules 2026, any person making a payment to a non-resident which is claimed as not chargeable to tax under the provisions of the Income Tax Act 1961 is required to furnish particulars of such remittance in Part-D of Form 145.
This requirement is specifically targeted at remittances where:
- The assessee concludes that the payment is not taxable in India, and
- No tax is deducted at source on such payment.
The rule operationalizes the reporting obligation by mandating that the assessee submit a structured set of details in Form 145 for all such transactions.
Information Required in Part-D of Form 145
The format of Part-D requires disclosure in a tabular form. For each category of remittance, the assessee must provide:
- Nature of remittance
- Total number of transactions falling under that nature during the year
- Aggregate amount of remittances under that category
- Amount not chargeable to tax
- Amount chargeable to tax
While the rule originally focused on self-reporting by the assessee, the new Clause 43 in Tax Audit Form No. 26 now compels tax auditors to independently examine and comment on these disclosures.
New Clause 43 in Tax Audit Form No. 26: What It Demands
Scope and Coverage of Clause 43
Clause 43 has been introduced in Tax Audit Form No. 26, applicable from Tax Year 2026-27. Under this clause, the Tax Auditor is required to report and comment on remittances disclosed in Part-D of Form 145.
In practical terms, the Tax Auditor now has to:
- Verify the nature of remittances reported in Part-D
- Confirm the number of transactions disclosed
- Reconcile the total amount of remittances
- Examine and state how much of the remitted amount is chargeable to tax
- Examine and state how much is claimed as not chargeable to tax
Thus, Clause 43 transforms Part-D disclosures from a self-declaration into an audited and opinion-based reporting area.
Auditor’s Opinion on Taxability
By virtue of Clause 43, the Tax Auditor is not just compiling figures; they are expected to form an opinion on the taxability of remittances disclosed in Part-D. This includes:
- Assessing whether the assessee’s stand that a remittance is non-taxable is sustainable
- Considering the provisions of the Income Tax Act 1961 and applicable DTAAs
- Evaluating whether any portion of the remittance should, in fact, have been subjected to withholding tax
Where the auditor disagrees with the assessee’s position, the inconsistency is likely to become a focal point for departmental scrutiny.
The Practical Problem: “Non-Taxable” Tag Used as a Shortcut
Common Business Practice with Foreign Vendors
In cross-border dealings, it is common for foreign service providers and vendors to insist that:
- No tax should be withheld from their invoices, and
- They must receive the full gross amount as per the contract or invoice.
Faced with commercial pressure and operational urgency, some assessees have adopted a shortcut practice: