What is Withholding Tax in India?

What is Withholding Tax?

Withholding tax is an obligation on the payer to withhold tax when payments are made for rent, commission, salary, professional services, to satisfy contract provisions, etc. Withholding tax is applicable in case of payments done to non-resident individuals. As per Section 195 of the Income Tax Act, it is the payee's responsibility to deduct tax when depositing the payment in the account of the Non-Resident Individual.

It is the responsibility of the payee to deposit the deducted withholding tax with the government. The amount of withholding tax in India depends on the type of income, the amount of income earned, and the tax laws of the country where the income is earned. The tax rate is decided as prescribed in the Income Tax Act, 1961 or Double Taxation Avoidance (DTA) Agreement, whichever is lower. The central government of India collects this tax.

According to a publication by the India Law Offices:

“The provisions of Withholding Tax are like machinery provisions applicable to the payer of the income to enable easy collection and recovery of tax and are independent of the charging provisions which are applicable for the recipient of the company.”

What are the benefits of charging Withholding tax in India?

There are several benefits of charging withholding tax, including

1. Ensuring Tax Compliance: Withholding tax is an effective way to ensure tax compliance by non-residents who may be subject to different tax regulations than residents. By requiring that taxes be withheld at the source of income, the government can ensure that non-residents pay their fair share of taxes on income generated within the country.
2. Generating Revenue: Withholding tax can also generate significant revenue for the government. By collecting taxes at the source of income, the government can ensure a steady stream of revenue from non-residents who may not be required to file tax returns in the country.
3. Reducing Tax Evasion: Withholding tax can also help to reduce tax evasion by non-residents. By requiring that taxes are withheld at the source of income, the government can prevent non-residents from under-reporting their income or failing to file tax returns.
4. Encouraging Investment: Withholding tax can also encourage investment in a country by providing a level of certainty for non-residents regarding their tax obligations. By knowing what taxes they will be required to pay on their income, non-residents may be more likely to invest in a country.

How to determine tax liability for withholding tax?

To calculate tax liability, it is important to know the residential status of any person:- “Resident Indian” and “Non-Resident Indian”. Hence to understand withholding tax, it is important to know how residential status is categorized in India:-

Determining the Status of Resident Indian or Non-Resident Indian:

1. Residential status: An individual is considered to be a resident in India for tax purposes if he or she satisfies any of the following conditions:
   1. Stays in India for 182 days or more during the financial year, or
   2. Stays in India for 60 days or more during the financial year and for 365 days or more during the 4 years immediately preceding the financial year.
   If an individual does not meet either of these conditions, he or she will be considered a non-resident for tax purposes.
2. Income earned or received in India: If an individual is a resident of India for tax purposes, he or she will be taxed on his or her global income, including income earned or received in India and outside India.
   If an individual is a non-resident of India for tax purposes, he or she will be taxed only on the income earned or received in India.
3. Citizenship or place of birth: Citizenship or place of birth is not a determining factor for residential status for tax purposes in India. An individual may be a citizen of India or born in India but may still be considered a non-resident for tax purposes if he or she does not meet the criteria outlined above.

What are the Withholding tax rates for payments to Non-Resident Individuals?

The withholding tax rates can vary depending on the country and the type of income paid to the non-resident. In some cases, tax treaties between countries may also affect the withholding tax rate. Here are some common withholding tax rates:

1. Dividends: Withholding tax on dividends paid to non-residents can range from 5% to 30%, depending on the country. In some cases, tax treaties may reduce the rate of withholding tax.
2. Interest: Withholding tax on interest payments to non-residents can range from 0% to 30%. Again, tax treaties may reduce the rate of withholding tax.
3. Royalties: Withholding tax on royalties paid to non-residents can range from 5% to 30%.
4. Services: Withholding tax on payments for services rendered to non-residents can range from 5% to 30%.

What are the consequences of non-payment of withholding tax?

The consequences of non-payment of withholding tax can vary depending on the country and the specific circumstances of the non-payment. However, some of the general consequences can be broadly classified as follows:

1. Penalties: Non-payment of withholding tax can result in penalties and interest charges. These penalties can be substantial and may increase if the tax remains unpaid.
2. Legal Action: The tax authorities may take legal action against the payer of the income for failing to withhold and remit the tax to the government. This can result in fines, legal fees, and other costs associated with defending against the action.
3. Reputation Damage: Non-payment of withholding tax can damage the reputation of the payer of the income. This can impact relationships with suppliers, customers, and other stakeholders.
4. Loss of Business Opportunities: Non-payment of withholding tax can also lead to the loss of business opportunities. Some companies may refuse to do business with a payer of income who has a history of non-payment or non-compliance with tax regulations.
5. Criminal Charges: In extreme cases, non-payment of withholding tax can lead to criminal charges. This is especially true if the non-payment is intentional and part of a larger tax evasion scheme.

Is withholding tax and TDS the same?

Withholding tax and TDS (Tax Deducted at Source) are similar concepts, but they are different. Withholding tax is a term used in some countries to refer to the tax deducted at source from payments made to non-residents. On the other hand, TDS is a term used in India to refer to the tax deducted at source from various payments made by residents to residents and non-residents.

Both withholding tax and TDS serve the same purpose: to ensure that taxes are collected at the source of income. They are used to ensure tax compliance and prevent tax evasion, and they can both have consequences for non-compliance, such as penalties and legal action.

What is the due date to file the Withholding returns?

In India, the due date for filing withholding tax returns (TDS returns) depends on the type of taxpayer and the frequency of the payments. The due dates for filing TDS returns for different categories of taxpayers are as follows:

What is the Withholding tax payment due date?

By the 7th of every month, the deducted withholding amount needs to be paid except for March, for which the due date for payment of withholding tax is the 30th of April.

How is the assessment of Non-Resident Indians 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 considered as “Agents” of a non-resident assessee are as follows:

• Individuals who are employees or trustees of non-resident Indians.
• Any individual who has any business connection with a non-resident.
• Any person receiving income from a non-resident or purchasing capital assets in India from a non-resident.

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.