Withholding tax is an amount that is directly deducted from the employee’s earnings by the employer and paid to the government as a part of individual’s tax liability. These taxes are paid to the central government of India. In India, the Central Government is liable and empowered to levy and collect taxes. Tax is charged based on the income of the person. The income is categorized into various slabs and whenever it exceeds the minimum threshold limit then it attracts taxes as per the rates decided for various income slabs prescribed in the Income Tax Act. Tax liability is decided by calculating the total income earned for the previous year in the current assessment year. As we know, the income tax payable by any person is dependent on the residential status of that person so to understand withholding tax we should know how residential status is categorized in India.
So let us first understand how the status of any person determines his tax liability. The residential statuses are “Resident Indian” and “Non- Resident Indian”. Even though the statuses are self-explanatory it is said that an individual is a resident Indian if in the previous year (April 1st to March 31st) he has stayed in India for a prescribed time period. The prescribed period of the previous year is either:
- 182 days or more in previous year (April 1st to March 31st).
60 days or more for aggregate of 365 days or more in 4 years preceding the previous year.
Any person who does not satisfy the above stated requirement is considered as a Non Resident Indian (NRI).
Tax Liability of a Non Resident Indian is different from that of a resident Indian. The Non Resident Indians are liable to pay tax on the income earned in India from the following sources which include:
- Salary paid for the services provided in India.
- Income from property in India or income arising out of the business carried out in India.
Fees, Royalty, Interest paid by Resident Indian to Non Resident Indian for the technical services provided by the Non-Resident Indian in India.
Now that we understand that tax liability is dependent on the residential status of a person, let us now learn more about withholding tax. Chargeability of the withholding tax is also dependent on the residential status of the person.
Withholding tax is a tax that is deducted by the payer of the income. This withholding tax is also called retention tax. Under withholding tax, the taxable amount is deducted at source by the payer i.e. the payer of the income is liable to deduct the withholding tax before making payment to the payee.
The withholding tax sounds similar to Tax deducted at source. Many are of the opinion that outside India the terminology for Tax deducted at source (TDS) is Withholding Tax. But there are few differences between TDS and Withholding Tax which we shall study subsequently. In India, the withholding tax is applicable on various sources of income namely: Salary, work contract, Commission, Rent, Interest, Professional services, Technical Services, Income from Business etc.
Let us see how a withholding tax is charged with use of an example which will make it easier to understand the its applicability and simplify the concept of withholding tax.
Example: Let’s assume that Mr. X is a doctor by profession. He is providing dental services to his patients. One such patient is Mr. Y who has taken dental services from Doctor Mr. X for which the doctor (Mr. X) has charged his patient (Mr. Y) a bill of Rs 50,000. So now while paying the bill to the doctor (Mr. X) the patient (Mr. Y) has credited Rs 45000 to the doctor (Mr. X) and deducted Rs 5000 as withholding tax. Mr. Y has deducted the withholding tax. Now it is Mr. Y’s liability to deposit the deducted withholding tax with the Central Government. Under withholding tax it is the liability of the payer to deduct the tax and deposit the same with the government. In the above stated scenario, the income tax credit can be availed by the doctor (Mr. X) while filling his income tax return.
Withholding tax is applicable in case of payments done to non-resident individuals. So when a liability to carry out payment to a Non-Resident Indian arises the payer is liable to deduct the tax at source. As per the Income Tax Act under section 195, it is obligatory for the payee, who is the person responsible to make payment, to deduct the tax at the time of payment or at the time of crediting the payment in the account of the Non-Resident Individual.
It is to be noted that the payment is taxable only on the chargeable income i.e. the chargeable payment to be done to the non-resident individual. If the payment does not fall under the tax net then the person responsible to make any such payment and deduction (payee) shall make an application to the assessing officer. An application to the assessing officer can also be made to know the exact chargeable portion on which the withholding tax has to be deducted. Only the person making payment for the services received by him from a non-resident individual can deduct withholding tax. And it is obligatory on the part of the payee to deposit the deducted withholding tax with the government. The withholding tax is to be deducted as per the prescribed rates stated in the act or at the rates mentioned in the Double Taxation Avoidance Agreement whichever is beneficial for the non-resident individual. Now that we have seen how withholding tax is charged and deposited with the government, let us now see the benefits of the withholding tax.
There are two major benefits related to the charging of withholding tax. They are as under:
- The first and most important beneficiary of charging withholding tax is the government. The primary benefit that the government gets is nothing but early generation of revenue. When a withholding tax is levied on a transaction the payee deducts the amount of the tax while making payment and deposits the same amount with the government. Thus the government receives the amount immediately or as and when any such transaction is incurred. So the payment is quick resulting in early generation of revenue for the government as the government doesn’t have to wait for the year end to receive the amount of the tax.
- The second benefit of charging withholding tax is that every transaction is under radar and scrutiny. Under withholding tax, it is the liability of the payee to deduct the tax and deposit the same with the government. So as the liability is on the payer it is imperative on the part of the payer to ensure that the amount of tax charged is correct and that the same correct amount is being deposited with the government in their account. So in this way every transaction is scrutinized at every check point i.e. at the time of charging the withholding tax and while paying the deducted tax to the government.
- Another most important benefit of withholding tax is that in this case tax evasion is not possible. This is because- firstly the non-resident individual cannot exit the tax net as he does not have to pay taxes but the payer has the onus of deducting and paying taxes. So it is imperative on the part of the non-resident individual to pay tax but through the payer. And secondly payer has to pay off the deducted tax to the government so both the payee and payer of the withholding tax cannot escape the tax net and thus tax evasion is controlled.
Let us now talk about the current rates that are applicable for payment of withholding tax to the non-resident individuals:
- Interest charged at 20%
- For Dividends paid by domestic companies no tax is charged i.e. NIL
- For Royalties it is 10%
- Technical Services are charged at 10%
For other services:
- Individuals are charged at 30% of the income
- Companies are charged at 40% of the income
The above stated rates are applicable with respect to countries with whom India does not have Double Taxation Avoidance Agreement (DTAA).
How is the assessment of Non Resident Assessees done?
The assessment of a non-resident assessee is done through an agent. A non-resident assessee may be accessed directly or through an “agent”. Persons who are considered as “Agents” of a non-resident assessee are as under:
- Employee or trustee of non-resident;
- Any person who has any business connection with the non-resident;
- Any person through whom or from whom the non-resident is receiving any income.
Any person who has acquired or purchased any capital asset in India from a non-resident.
Consequences of Non-payment of withholding tax:
The consequences of non-payment of withholding tax are broadly classified as under:
- Penalties for non-deduction and failure to pay the deducted tax to the government may result in a minimum penalty- an amount imposed by the assessing officer and the maximum amount of penalty is equal to the tax amount that is not deducted or paid.
Interest shall be payable till the date of non-payment of withholding tax is done.
What is the difference between withholding Tax and TDS?
On the first look we may find similarities between withholding tax and Tax deducted at source but there is a difference between the two. Withholding tax and Tax deducted at source are different in their scope and approach which can be stated as under:
- Tax deducted at source is the amount that is to be deducted at the time of making payment to the contractors, professionals etc. whereas withholding tax is the amount deducted in advance i.e. before paying the amount to the payee withholding tax is deducted for paying the tax to the government.
TDS is entitled to the people of India while withholding tax is applicable for payments to non-residents i.e. foreign transactions. E.g.: Apply TDS while making payments to the vendors and while making payments to foreign vendors apply withholding tax.
What is the Withholding tax payment due date?
The withholding tax that is deducted is to be paid by 7th day of the month in which withholding tax has been deducted except for the month of March for which the due date for payment of withholding tax is 30th April.
What are the Withholding Tax returns filling due date?
The returns are filed quarterly and contain the details of every payee and tax deducted for that particular quarter. Following is the table stating dates of filing the returns.
|Particulars||Form 24Q and 26Q||Form 27Q||Form 27EQ|
|1st Quarter (April-June)||15th July||15th July||15th July|
|2nd Quarter (July-Sep)||15th Oct||15th Oct||15th Oct|
|3rd Quarter (Oct-Dec)||15th Jan||15th Jan||15th Jan|
|4th Quarter (Jan-March)||15th May||15th May||15th May|
Withholding tax Certificate:
Withholding tax deduction certificate has to be provided by the payer to the payee for every quarter. This withholding tax deduction certificate can be obtained online by downloading it from the TRACES website.
PAN Card and Filling of returns:
As per the amendment dated 1st April 2010, it is required for a foreign company to register with the Indian Tax authorities and obtain a Permanent Account Number (PAN). The foreign company has to furnish its PAN to the payer in India. If the company fails to furnish the PAN or does not have a PAN then withholding tax will be charged at a higher rate than the existing rate or at 20%. This results in additional withholding taxes to be levied and for which no credit can be availed in a foreign country. Also another important aspect is that if there is no PAN then no application can be entertained for lowering of withholding tax. So it is very much advisable for foreign companies to obtain a PAN if they are receiving commission/ fees/ royalties/ interest from the Indian companies.