Withholding Tax

Withholding tax is an amount of which deduction takes place directly from the earning of an employee by the employer. It is paid to the government as a part of the tax liability of an individual. The central Government of India is liable for this tax collection. In India, the Central Government is empowered to levy and collect taxes. Based on the income of the person, the tax is being charged.

Withholding tax is also known as Retention tax. As per the Income Tax Act, under section 195, it is obligatory for the payee, who is the person responsible to make a 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.

Income is categorized according to various slabs. So, whenever the minimum threshold limit increases, it attracts taxes as per the rates decided for various income slabs prescribed in the Income Tax Act.

How to calculate tax liability?

It is by calculating the net income earned for the previous financial year in the current assessment year. Everyone knows that income tax payable of any individual is based on the residential status of an individual. So, for understanding the withholding tax, it is a must to know how residential status is categorized in India?

Residential status is of two types mainly:

• Resident Indian
• Non- Resident Indian

Firstly, understand that how the status of any person determines the tax liability. Even though the above mention two types of status are self-explanatory, it is being said that if an individual is an Indian resident in the previous financial year and stays in India for a prescribed period then it should be either reside for:

• 182 days or more in the previous financial year that is between April – to March31 of next year.
• 60 days or more for an aggregate of 365 days or more in 4 years preceding the previous year.

If anyone who does not satisfy the above-stated requirements are considered as Non- Resident Indian. One must keep in mind; tax liability of Non- Resident Indian is different from that resident Indian. Only those NRIs are liable to pay tax who were earning income in India from sources mentioned below:

• Salary paid for services provided in India
• Income earned from property in India or income arising out of business carried out in India.
• Fees, royalty, interest paid by Resident Indian to NRI for giving any technical services offered by the Non-Resident Indian in India.

Working on withholding Tax is quite like the working of Tax Deducted at Source. In outside India, terminology used for Tax Deducting at Source is withholding tax. But if we talk about India, here withholding tax is applicable on various income sources such as salary earned from work, commission, rent, professional services, technical services or income from business, etc.

Let us see how a withholding tax is charged with the use of an example which will make it easier to understand 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 filing his income tax return.

Main advantages related to charging of withholding tax are as follows:

The primary benefit is that the government gets nothing, but it is an early revenue generation. 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. The Government receives the amount immediately or as when any such transaction is incurred.

The second benefit is that every transaction made is under radar and scrutiny. It is the liability of payee to do the tax deduction and deposit the same with the government. So, the liability is on the payer, it is must for the payer to check that the tax charge is accurate and same deducted amount is deposited with the government. So, for this, transaction is scrutinized at every check point.

The third benefit of charging the withholding tax is that in this case, tax evasion is not possible. Firstly, Non-Resident Indians cannot exit from paying taxes as NRI does not has to make direct payment of taxes, but the payer has the onus of deducting and paying taxes. So, the NRIs must pay tax via payer. And secondly, the payer needs to pay off the deducted tax to the government.

Rates of Withholding Tax

Rates that are applicable for the payment of withholding tax to the Non- Resident Indian individuals are as follows:

• Interest charged 20% for dividends paid by domestic companies
• No tax is being charged for royalties
• 10% for technical services are charged
• 10% for other services
• Individuals are charged 30% of the Income.
• Companies are charged 40% of the Income.

The above-stated rates are applicable concerning countries with whom India does not have a double taxation avoidance agreement.

Process of doing Assessment of Non- Resident Indian

• Assessment of Non- Resident Indian done with the help of an agent. A non- resident assessee also access even directly. Person who is considered as "agents' of a non-resident assessee as under:
• Employee or trustee of non-resident Indian
• Any individual who has any business connection with non-resident. Any person through whom or from whom non-resident is receiving any income.
• Any person who has acquired or purchased any capital asset in India from a non-resident. One needs to keep in mind that before being treated as an “agent” of the non-resident is given an opportunity to give representation or to be heard.

Consequences of Non-payment of withholding tax:

• Penalties for non- deduction and failure to pay deducted tax to the government that may result in a minimum penalty.
• Assessment of Non- Resident Indian done with the help of an agent. A non- resident assessee also access even directly. Person who is considered as "agents' of a non-resident assessee as under:

What is the difference between withholding tax and TDS?

What is the Withholding tax payment due date?

The withholding tax that is deducted is to be paid by the 7th day of the month in which withholding tax has been deducted except for March for which the due date for payment of withholding tax is 30th April.

What are the Withholding Tax returns filing due date?

The returns are filed quarterly, and it includes details about every payee and tax deducted for that quarter.

Following is the table stating the dates of filing the returns.

Form 24Q and 26Q Form 27Q Form 27EQ1st Quarter (April-June) 15th July 15th July 15th July2nd Quarter (July-Sep) 15th Oct 15th Oct 15th Oct3rd Quarter (Oct-Dec) 15th Jan 15th Jan 15th Jan4th Quarter (Jan-March) 15th May 15th May 15th May.

Withholding Tax Certificate

• It is to be given 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 Return filing

• According to the amendment dated on April 1, 2010. It is a must for a Foreign company to do registration with Indian Tax Authorities and obtain a Permanent Account Number.
• It is a must for a Foreign company to furnish PAN details to the payer in India.
• If company is not able to provide PAN details or do not have a PAN, in that case, Withholding tax will be charged at a high rate of interest than the existing rate or flat 20%.This results in additional withholding taxes to be levied and for which no credit can be availed in a foreign country.
• If there is no PAN, then no application will be accepted for reduced 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.