The Indian Constitution has empowered only the Central Government to levy and collect taxes. Every person whose total income exceeds the maximum exemption limit shall be chargeable to the income tax at the rate or rates prescribed in Income Tax Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. But the total income of the individual is determined on the basis of the residential status in India. Withholding tax is an obligation on the payer to withhold tax at the time of making payment under specified head such as rent, commission, salary, professional services, contract etc. at the rates specified in tax regime. The income is categorized into various slabs and whenever it exceeds the minimum threshold limit, it attracts taxes at the rates prescribed in the Income Tax Act.
Example – Let’s assume that Ram is a dentist by profession. He is providing dental services to his patients. One such patient is Simran who has taken dental services from Ram for which he has charged her a bill of INR 50,000. So, now while paying the bill to doctor, Simran has credited INR 45000 to him and deducted INR 5000 as withholding tax. Simran has deducted the withholding tax. Now it is patient Simran’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 Ram while filling his income tax return.
Applicability of withholding tax
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.
Chargeability of withholding tax
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. 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. 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.
Rates of withholding tax
Current rates for withholding tax for payment to non-residents are:-
- Interest: 20 %
- Dividends paid by domestic companies: Nil
- Royalties: 10%
- Technical Services: 10%
- Any other services:
- Individuals: 30% of the income
- Companies: 40% of the net income
The above rates are general and are applicable in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).
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.
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.
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 and filling of returns
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.
Some key notes to be kept in mind for withholding tax are mentioned below:
- Percentage to be increased by a surcharge and health and education cess to compute the effective rate of tax withholding.
- Income from units of specified mutual funds is exempt from tax in the hands of the unit-holders.
- Dividends received from Indian companies are tax-free in the hands of the shareholder.
- Short-term capital gains on transfer of shares of a company or units of an equity-oriented fund would be taxable at 15% if they have been subjected to STT.
- There is no threshold for payment to non-resident companies up to which no tax is required to be withheld.
- If PAN of the deductee is not quoted, the rate of tax will be the rate specified in relevant provisions of the Act, the rates in force, or the rate of 20%, whichever is higher. The government has notified rules that do not mandate quoting of PAN, subject to certain conditions.
- The payer is obligated to report specific information in the prescribed form (whether or not such payment is chargeable to tax).
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