Withholding Tax (WHT), also known as retention tax, is a requirement for the person (residents/non-residents) to collect tax on certain payments like commissions, rent and salary to professional service providers, fulfil contract requirements, etc. The rates are set in the tax system of India.
In 1961, the Income Tax Act set the tax rate in the applicable Double Taxation Avoidance Agreement (DTA). Non-residents have to pay tax in India on income from sources which include:
- Residents pay royalties, interest and other fees for technical services.
- Salary for services provided in India.
- Earnings derived from a commercial link or property in India.
Did you know?
To ease measures to counter the effects of the COVID-19 virus, the Indian government provided an increase in WHT. It was 25% for the payments residents received from 14 March 2020 to 31 March 2021. Therefore, the existing rates were cut by 25%. For example, if the WHT rate is 10%, it becomes 7.5% if payment was made from 14 March 2020 to 31 March 2021.
What are the Withholding Tax Rates in India?
In India, the current withholding tax rate for payments to non-residents is:
- Interest – 20%
- Dividends paid by domestic companies – Nil
- Royalties – 10%
- Technical services – 10%
- Individuals – 30% of the income
- Companies – 40% of the net income.
Note: These are general rates that apply to nations with which India has no Double Taxation Avoidance Agreement.
What is Withholding Tax Meaning?
You should note that the payment is tax-deductible only on the income chargeable to it, i.e. the chargeable payment made to a non-resident. If the payment doesn't qualify for a tax deduction, then the person responsible for making such deduction or payment (payee) has to make an application with the assessor.
The payee can request the assessor to determine the exact amount chargeable for which the tax withholding needs removal. Only the person making the payments for services received from a non-resident can deduct withholding tax. It is mandatory for the person making the payment to deposit the tax deducted withholding to the government.
The withholding tax is palpably according to the rates that the law implemented. Also, it can be the rates specified within the DTA Agreement, whichever is most beneficial for the non-resident. After we've learned how tax withholding is collected and paid to the government, let's look at the advantages. We hope you understand what is withholding tax after reading the above explanation.
Why is Withholding Tax in India Implemented and for Whom?
After you know the withholding tax definition, two significant advantages come with collecting withholding taxes. They are as follows:
1. The primary and foremost benefit of taxing withholding taxes can be found in the state government. The most significant benefit that the government reaps is an early generation of revenue. If a withholding tax is imposed on a transaction, the person making the payment takes the amount of tax when making the payment. After that, these taxes deposit the exact amount to the government.
2. The government then receives the tax promptly or when the transaction occurs. This means that the tax is paid quickly and results in the quicker creation of revenue for the government. It does not have to wait until the end of the year for the amount of tax. The other benefit of imposing withholding taxes is that each transaction is monitored and kept under scrutiny.
What is the Withholding Tax Definition?
Withholding tax is the responsibility of the tax payee person to pay the tax to the government. Since the burden is on the payer, it is the payee's responsibility to ensure that the tax amount assessed is correct and the exact amount is deposited with the government account.
In this manner, every operation is examined at each checkpoint, i.e. when it comes to paying the tax withholding and paying the withheld tax back to the government. Another significant benefit of tax withholding is that tax evasion isn't possible.
This is because the non-resident can't escape the tax net since they do not have to pay taxes, but the taxpayer is in charge of deducting taxes and paying them. This makes it imperative for the non-resident to pay taxes through the taxpayer. In addition, the payer has to pay the tax deduction to the government. This ensures that both the payer and the payee of the tax withholding cannot avoid the tax net, so tax evasion is managed.
Also Read: What is Section 195 –TDS on Non-Residents?
How can You Tell the Differences Between Withholding Tax in India & TDS?
There may be a lot in common between tax withholding and Tax Deducted at Source on first inspection. However, there's a distinction between the two. Withholding tax and Tax Deducted at Source differ in terms of method of operation and their scope.
Tax Deducted at Source refers to the amount to be taken out when paying the contractors, professionals and others. While withholding tax has a reduction from the advance, for example, before paying the tax amount to the payer, Withholding tax gets a deduction to pay taxes to the government.
TDS is available to residents of India; however, withholding tax applies to the payment of non-residents, i.e. foreign transactions. For example, use TDS when you make payments to vendors. Also, when making payments to vendors from abroad, apply withholding tax. Also, if you need loan support without complicated procedures, read how to apply for a loan in 2022 without complications.
The Benefits of Tax Withholding
As you've already understood the withholding tax meaning, let's move toward the main advantage.
The main advantage lies in the fact that the state receives no benefit, but it's an early source of revenue. Taxes on withholding are imposed upon a transaction, and the paying party deducts tax when making a payment and then deposits the exact amount to the government. The government receives the money promptly or when transactions are incurred.
Another benefit is that any transaction is monitored and scrutinised. It is the payer's responsibility to make the tax deduction and deposit that amount to the government. Therefore, the responsibility lies on the taxpayer. It is the taxpayer's responsibility to ensure whether the tax deduction is correct and the exact tax amount is paid to the government. Therefore, the transactions are scrutinised at each point of entry.
The third advantage of charging taxes withholding is in this instance. Tax evasion isn't likely. First of all, Non-Resident Indians are not exempt from the payment of taxes since an NRI cannot make tax payments directly. However, the payer bears the responsibility of deducting taxes and paying them. Therefore, NRIs have to pay taxes through the taxpayer. In addition, the payer has to pay the tax deduction and the tax to the state.
The Effects of Not Paying Withholding Tax
- Penalties for tax evasion and non-payment of tax deducted to the government could result in the payment of a minimum penalty.
- Assessment of NRI is done with the aid of an intermediary. Non-resident assessees may also be able to access the evaluation directly.
The Pan Card and the Return Filing
- By the amendment made on 1 April 2010, foreign companies must sign up with the Indian Tax Authorities. This is to obtain a permanent account number.
- Any foreign company needs to supply PAN information to the payee in India.
- If the business cannot provide PAN information or does not possess a PAN, the tax on withholding will be paid at a much higher rate of interest. It is higher than the current rate of a flat 20%. This will result in additional taxes on withholding imposed, and there is no credit available in an overseas country.
- If there isn't a PAN, there will be no acceptance of the application to reduce withholding tax. Therefore, foreign businesses need to get a PAN when they receive commissions, royalty, fees or interest from Indian companies.
The Tax System for India's Withholding Tax and the Finance Act, 2021
The Finance Act 2021 has enacted an increase in Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) for non-filers of tax returns for income. The TDS will apply to people who earn interest and dividend income, income from capital gains or annuity pensions. However, this greater TDS can only be applied to a specific group of return filers who are not filers.
Additionally, this new subsection is not applicable if the tax on the salary has a tax reduction. The same applies to earnings from the securitisation trust, winnings from horse races, lotteries or cash withdrawals that exceed ₹20 lakhs. If you want to opt for a loan without any complicated methods, Khatabook handles it all while providing you with gold loans with the least interest rates.
This article was all about withholding tax and how it is different from TDS. The main advantage lies in the fact that the state receives no benefit, but it's an early source of revenue. Taxes on withholding are imposed upon a transaction, and the paying party deducts tax when making a payment and then deposits the exact amount to the government. The government receives the money promptly or when transactions are incurred.
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