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 Resident
The 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 year
II. 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
covered
No threshold exemption for the purposes of Sec 195
Explanation added w.r.e.f 1st April 1962 (Non
Resident is expressly covered as deductor) (Fall out of
Vodafones 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 done
At the earliest of credit or payment to the payee
Where 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
without
Challan)
(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
30
th
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. Others
30
th
Jun 31
st
Jul 15
th
Jul
30
th
Sep 31
st
Aug 15
th
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 195
Yes, 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 pay
Section:-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 Tax
Current 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 under
Particular 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.