Withholding Tax

Withholding tax - Introduction

Income tax withheld from employees' wages and paid directly to the government by the employer.

A tax levied on income (interest and dividends) from securities owned by a Non-resident.

Withholding Tax is an obligation on the payer to withhold tax at the time of making payment under specified head such as rent, commission, salary, professional services, contract etc. at the rates specified in tax regime.

The Withholding tax provisions are in the nature of machinery provisions applicable to the payer of the income to enable easy collection and recovery of tax and are independent of the charging provisions which are applicable to the recipient of the company.

Status of Resident or Non Resident

Status of Resident or Non ResidentThe income tax to be paid by individual is determined on the

basis of his residential status. An individual can be termed as a “resident” if he stays

for the prescribed period during the previous year (1st April to 31st March) either for I. 182 days or more in previous yearII. 60 days or more and has been in India in aggregate for 365

days or more in four years preceding previous year.

Any person who does not satisfy this requirement is termed as ‘non resident’.

Taxability of Non resident

Non residents are liable to tax in Indian source income, including:

Interest, royalty and fees for technical services paid by an Indian resident,

Salary paid for services rendered in India,

Income arises from business connection or property in India.

Direct Tax provision

Where any payment is to be made to a non resident, the payer is obliged to deduct at source. As per Section 195 of the Income Tax Act, an obligation on the person responsible for payment to deduct tax at source at the time of payment or at the time of the credit of the income to the account of the non-resident

If the payment would not be taxable, the person responsible for making such payment may make an application to the accessing officer to determine appropriate proportion which shall be chargeable to tax. The tax is required to be deducted only on the chargeable proportion.

Section 195(1)

Any person responsible for paying to a non-resident/ foreign company any interest or any other sums chargeable under the provisions of the Act (other than income chargeable under the head ‘salary’)

shall at the time of payment or credit of such income to the account of the payee, whichever is earlier

deduct income-tax thereon at the ‘rates in force’ Provided that in the case of interest payable by the

Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode.

Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O

Types of payments covered U/s 195 & Scope of Sec 195

Any Interest [Not being interest referred to in Sec 194LB/194LC]

Or any other sum [Not being salaries] salaries] chargeable chargeable to tax.

&Wider in scope - all types of payers (Deductors) are

coveredNo threshold exemption for the purposes of Sec 195Explanation added w.r.e.f 1st April 1962 (Non –

Resident is expressly covered as deductor) (Fall out of Vodafone’s case).

Rate at which TDS is to be done The TDS is to be done at the rates in force.Time when TDS is to be doneAt the earliest of credit or payment to the payeeWhere payment is by the Govt /PSB/PFI, TDS shall

be at the time of payment.Time for remittance of TDS

Deducted by an office of the Government

Deducted by others

(1) On the same day (Tax paid withoutChallan)(2) Within 7 days from the end of the month in which the TDS is done or tax is due U/S 92(1A)(Tax paid with Challan)

(1) Sums of Apr to Feb month : Within7 days from the end of the month in which the TDS is done or tax is due U/S 192(1A).(2) Sums of Mar month: Within 30th April

Due dates for filing such returns

Forms – 24Q For filing details of Sec 192 [i.e salaries.], 27Q For filing details of Sec 193 to 196D (deductee is a

NR) 26Q All Other Cases All above forms are to be accompanied by 27A

Quarter For Govt. Others30th Jun 31st Jul 15th Jul

30th Sep 31st Aug 15th Aug

31st Dec 31st Jan 15th Jan

31st Mar 15th May 15th May

Cases where no TDS is to be done• Dividends covered U/S 115-O• Deposits by NRs/ RNORs with Off Shore Banking Units

Consequences of non-deduction of tax in respect of sums payable to non-residents

• Disallowance U/S 40a (i) at the time of computation of income.• Results in 201 “Assessee-In-Default.” [Amendment is

applicable only for residents]• Liable for interest [U/S 201(1A)] [1% or 1.5% per month as the case may be] • Liable for Penalty [U/S 221]• Prosecution U/S 276BB is attracted (Min 3 months; Max: 7 Years + fine.)

Consequences for non-delivery or late delivery of Quarterly E-TDS returns or Returns filed with mistakes

• Fee of Rs 200/- per day shall be attracted for the period of failure U/S 234E• Penalty in the range of Rs 10,000 to Rs 100,000/- shall be levied U/S 271H

Special Rates given Sec 94A [Transactions With persons located in notified jurisdictional

area] Higher of . Rates in force . Rate specified in the relevant rovisions of the Act 30%. Special Provisions of Sec 206AA: [Cases where PAN number is not available Higher of . Rates in force . Rate specified in the relevant provisions of the Act 20%Whether TDS is to be recalculated and once again done on account of foreign exchange fluctuations.

• Can the deductor effect TDS at a lower rate or nil rate• Mechanism for payer given in Sec 195(2)- approach

the department and seek the TDS rate

• Mechanism for payee given in Sec 195(3)- approach the department to receive sums without TDS

In “GE India Technology Cen (P) Ltd Vs CIT” [2010] [193 Taxman 234], the SC held that where a person responsible for deduction is fairly certain, then he can make his own determination as to whether the tax is deductible at source and, if so, the right amount that should be deducted before effecting any payment to non-resident. To nullify this judgment, Sec 195(7) has been introduced.

Surcharge and Education Cess with regard to TDS and TCS

If TDS rates are as per DTAA: No surcharge and No E.Cess

No surcharge and No E.Cess when TDS is as per 206AA Can the AO recover from the non-resident if

the resident fails to deduct TDS U/S 195Yes, results in tax liability of non-resident to pay

income tax in respect of such payments but interest

U/s 234B cannot be levied on the non-resident[ADIT Vs Alcatel Lucent USA Inc] [2012] [21

Taxmann.com 302] [Delhi – Tribunal]

Income in respect of units of non-residents

Section:- 196A (A) Any person responsible for paying to a non-

resident, not being a company, or to a foreign company, any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent :

Provided that no deduction shall be made under this section

from any such income credited or paid on or after the 1st day of April, 2003.

(B)Notwithstanding anything contained in sub-section (1), no deduction of tax shall be made from any income payable in respect of units of the Unit Trust of India to a non-resident Indian or a non-resident Hindu undivided family, where the units have been acquired from the Unit Trust of India out of the funds in a Non-resident (External) Account maintained with any bank in India or by remittance of funds in foreign currency, in accordance, in either case, with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and the rules made there under

Certificate for deduction at lower rate.Section:- 197

(1) where, in the case of any income of any person [or sum payable to any person], income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions, the Assessing Officer is satisfied] that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax as the case may be, the [Assessing] Officer shall, on an application made by the Assessee in this behalf, give to him such certificate as may be appropriate.

(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the [Assessing] Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

(2A) The Board may, having regard to the convenience of assesses and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.

Consequences of failure to deduct or paySection:-201

1) Where any person, including the principal officer of a company,—(a) who is required to deduct any sum in accordance with the provisions of this Act; or(b) referred to in sub-section (1A) of section 192, being an employer,

does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an Assessee in default in respect of such tax:

Provided that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.

(A) Without prejudice to the provisions, if any such person,

principal officer or company as is referred to in that sub-section does not deduct [the whole or any part of the tax] or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at [one per cent for every month or part of a month] on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid [and such interest shall be paid before furnishing

(2) Where the tax has not been paid as aforesaid after it is deducted, [the amount of the tax together with the amount of simple interest thereon referred to in sub-section (1A)] shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in sub-section (1).

The following sub-sections (3) and (4) shall be inserted after sub-section (2) of section 201 by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2010 :

(3) No order shall be made under sub-section (1) deeming a person to be an Assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of—(i) two years from the end of the financial year in which the statement is filed in a case where the statement referred to in section 200 has been filed;(ii) four years from the end of the financial year in which payment is made or credit is given, in any other case :

Provided that such order for a financial year commencing on or before the 1st day of April, 2007 may be passed at any time on or before the 31st day of March, 2011.

Rates of Withholding TaxCurrent rates for withholding tax for payment to non-

residents are:- Interest: 20 % Dividends paid by domestic companies: Nil Royalties: 10% Technical Services: 10% Any other services: A)Individuals: 30% of the income B)Companies: 40% of the net income

The above rates are general and are applicable in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA).

Double Taxation Avoidance Agreement In case of countries with which India has double taxation

avoidance agreements, the tax rates are determined by such agreements and are indicated for various countries as underParticular Dividend (other

than referred under Section 115O)

Interest

Royalty Fees for the Technical Services

Australia

15% 15% (Note 2)

(Note 2)

Canada 15% if at least 10% of the shares of the company paying the dividends is held by the recipient of dividend; 25% in other cases

15% (Note 1)

10-20% 10-20%

China 10% 10% (Note 1)

10% 10%

France 10% 10% 10% 10% Germany

10% 10% (Note 1)

10% 10%

And many other countries also have specific rates. Note:1. Dividend / Interest earned by the government and certain institutions like

Reserve Bank of India is exempt from taxation in the country of source.2. Royalties and fees for technical services would be taxable in the country

of source at the following rates : (a) 10 per cent in case of rental of equipment and services provided along with know-how and technical services ; (b) any other case . during first five years of the agreement i) 15 per cent if the payer is Government or specified

organization; ii) 20 per cent in other cases; . Subsequent years, 15% in all cases. Income of Government and certain institutions will be exempt from

taxation in the country of source.3. Royalty and fess for technical services would be taxable in the country of

source at the following rates:-

a) 10 per cent in case of royalties relating to the payments for the use of,

or the right to use, industrial, commercial or scientific equipment; b) 20 per cent in case of fees for technical services and other royalties.

Consequence of failure to deduct or pay tax Where any person, who is required to deduct any sum in accordance with Income Tax Act but does not deduct, or does not pay or after deducting fails to pay shall deemed to be ‘assesse in default’ and the assessee shall be liable for interest and penalty.