Withholding Tax is the obligation on the part of the payer (resident or nonresident) to withhold respective taxes when making payments to a payee (recipient who is resident/non-resident) for purposes such as rent, salary, commission, contract, professional services etc. The provisions of the withholding tax are implied upon the payer of income and are separate from the provisions applicable on the recipient.
In the event of payments made to a non-resident, the payer is required to deduct tax at source as per Section 195 of the Income Tax Act, 1961. In case the payments made are not fully chargeable towards withholding tax, the payer needs to submit an application to the assessing authority to outline the amount of payment to be chargeable for tax. The following payments fall under the ambit of withholding taxes when made towards non-residents who:
- Have permanent establishment in the country.
- Are looking for tax refunds withheld in the country.
- Are investors earning capital gains, interests etc. sourced from India.
- Are receiving fees or royalties from technical services sourced in India.
- Are receiving capital gains from transfer or sale of Indian assets.
- Are involved in offshore transaction with share transfers in an Indian business.
- Are earning some any form of income from India.
The companies actually making payments in the above mentioned circumstance need to withhold taxes are face penalties from taxation authorities.
In terms of the payees where withholding tax has been deducted in the circumstances mentioned above, the payee needs to file tax return in India. This is imperative even if the payee is benefitting from tax treaties or has no tax liability. The onus lies on the payee to declare treaty benefits or any other information. The payee who falls under the umbrella as defined above has to file income tax return in India regardless of his actual tax liabilities.
Withholding Tax Rates in India:
The withholding taxes to be deducted are calculated as per relevant sections of the Income Tax Act, 1961 or the Double Taxation Avoidance Agreement (DTAA), whichever benefits the assessee more. The rates of withholding taxes with respect to countries without DTAA with India are as follows:
- Interests earned at 20%
- Dividends paid by domestic companies at 0%
- Technical services at 10%
- Royalties at 10%
- Other services for individuals at 30% of income
- Other services for companies at 40% of net income
For countries with DTAA agreement with India, the withholding rates are as specified here. Payees are required to provide PAN details to the payer. Else they will be charged taxes at enhanced rate of 20% instead of the normal range of 10-15%. Non-residents can opt for tax governance by India or through applicable tax treaties with other countries. For governance through tax treaties, the non-resident needs to submit Form 13 so as to get approval for tax withholding at reduced rates. Non-residents also need to submit Form 15C or Form 15D for receipt of amounts without any withholding tax.