Everything to Know About Withholding Tax

There are mainly two ways a taxpayer pays income tax to the government of India. The first is fairly straightforward.Before the income tax due date, we calculate our tax liability and file our IT returns. Whatever income tax we calculate, we’re liable to pay, and this responsibility falls on us.But there are certain other types of taxes that are not directly paid by us but are deducted from our salary or other payment and then paid to the government. Here, the responsibility of the tax payment falls on the payer. Some examples of such taxes are Tax Deducted at Source (TDS) and Withholding Tax or Retention Tax.In this blog, we’ll be discussing Withholding Tax in detail.

Withholding tax is a type of tax that is deducted from an employee’s salary by the employer before payment, and this deducted amount is then paid to the government. It is the responsibility of the payer or whoever is making the payment to deposit the applicable Withholding tax in India.Income tax is liable according to various tax slabs and limits. Once a certain threshold income limit is reached from a particular source, then Withholding tax may be applicable. It is mandatory for the payer or employer to pay Withholding tax on the taxpayer's behalf whenever applicable.Let's understand Withholding tax with an example:Suppose Mr. Khanna is providing a service to a client. He presents a bill of Rs. 50,000 to the client. Now, supposing that withholding tax is applicable in this situation, the client only pays Rs. 45,000 out of the bill amount and deducts Rs. 5,000 as Withholding Tax.The client is now liable to deposit the deducted tax with the Central Government by the due date. Mr. Khanna has effectively paid Withholding tax and can claim credit for this tax when he files his IT returns at the end of the year.

Any country or government charges taxes in various forms, and the sole reason is to generate revenue. This revenue from income tax and other taxes is then used for infrastructural, economic and healthcare development, among other uses.Withholding tax, too, is charged in order to generate revenue early. The annual income tax is collected late in the financial year. Hence, taxes like the Withholding tax allow the government to generate income throughout the year since it is paid instantly by the payer.The second benefit of the Withholding tax is that every transaction is now recorded and scrutinised. The onus of payment falls on the one making the payment. Hence, every such payment comes under the government's radar. This enables the tax authorities to keep a check on all the transactions that are occurring throughout.The third benefit of Withholding tax is curbing tax evasion. Since the tax must be immediately paid by the payer, there is no way one can evade this tax.

Withholding tax is charged at the following rates for different payments:

• For dividends paid by domestic companies, the Withholding tax is charged at 20%.
• No Withholding tax is charged for royalties paid.
• Payments for technical services are taxed at 10%.
• For other services, withholding tax is charged at 10%.
• Individuals are taxed at 30% of their income.
• Companies are charged 40% of their income.

A non-resident assessee can assess their Withholding tax via an agent. Alternatively, they can even get their assessment done themselves.The following persons can be considered as agents for non-resident assessees:

• An employee or trustee of a Non-Resident Indian can do the assessment on their behalf.
• Any person who has any business relations with non-resident assessees can be an agent.
• Any individual via whom or from whom the Non-Resident Indian is receiving an income can also be considered an agent.
• Any individual or person who has purchased any capital asset in India from a non-resident can be an agent.

Withholding tax and Tax Deducted At Source (TDS) may feel similar because both are a form of tax paid during payments. But there is a difference between the two.TDS is a tax that is deducted from payments made to contractors and professionals in India and then paid to the government. This tax is directed at resident Indians only.Withholding tax, on the other hand, is deducted in advance before making the payment outside India. Withholding Tax is only directed at Non-Resident Indians.Thus, the main difference between Withholding tax and Tax Deducted At Source is that one is deducted from payments made outside India and the latter is deducted from payments made within India.

Withholding tax is to be paid by the 7th date of the same month during which it was deducted. This is true for all months except the month of March, for which the Withholding Tax is to be paid by 30th April.

Failure to pay the Withholding tax by the stipulated time attracts penalties. A minimum penalty may be imposed and decided by the assessing officer. A maximum penalty may be charged, which is usually equal to the tax amount not deducted or unpaid.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.