Withholding Tax In India

Withholding Tax is the obligation of the taxpayer to withhold tax while making payments under specific heads (such as rent, commission, payment for professional services, salaries, contracts, etc.) at the rates that have been specified in the existing tax regime.

Direct Tax Provision - In cases where payments are to be made to Non-Resident Indians, the payer is obligated to deduct at the source. Section 195 of the Income Tax Act, 1961, states that the obligation lies on the person responsible for the payment to deduct taxes at source at the time of payment (or at the time of the credit of the income to Non-Resident Indian’s account).

The Central Government of India is authorized to collect income taxes from everyone whose income exceeds the maximum exemption limit. The rates of taxation are prescribed in the Income Tax Act, and the total tax payable will be calculated on the income of the previous year, to be paid in the year of assessment. The total income of the individual, however, is determined based on his or her residential status in India.

Status of Resident Indian or Non-Resident Indian - The status of Resident Indian or Non-Resident Indian is determined after computing the total duration of the assessee’s stay in India during the preceding financial year. To qualify as a Resident Indian, the assessee must have stayed in India for:

• 182 days or more in the previous year, or
• 60 days or more, and has been in India for an aggregate of 365 days or more in the 4 years preceding the previous year.

An individual who does not satisfy either of the above requirements is categorised as a Non-Resident Indian.

Withholding Tax Rates

Mentioned below are the tax rates as applicable to Non-Resident Indians.

Here are the tax rates for payments by resident companies:

Here are the tax rates for payments to non-resident companies:

Importance of Withholding Tax

• Withholding tax can significantly help the government by generating more 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. This helps in the 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.
• Charging withholding tax for 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. 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. Thus, every transaction is scrutinized at every checkpoint 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 it discourages tax evasion. 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. Thus, it is imperative on the part of the non-resident individual to pay tax but through the payer. And secondly, the 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.

FAQs

End Note:

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. It is important to learn and understand withholding tax as it could impact any salaried individual whose income is beyond the threshold set by the government.