Withholding Tax in India

Some deductions made before the payments like rent, commission, salaries, etc. are processed. It is vital to know about these deductions and why the amount is withheld by the government even before you make a payment. This deduction is carried out under the withholding tax provisions.

What is Withholding Tax?

Withholding Tax (WHT) is an obligation imposed on individuals (whether residents or non-residents) to withhold tax when making payments of a specific nature, such as rent, commission, salary, for professional services, to satisfy contract provisions, and so on, at rates specified in India's tax regime.

Withholding tax enables easy collection and recovery of tax from foreign companies and non-residents of the country. It is a provision applicable on the payer of incomes that are chargeable under the Income Tax Act, 1961. For example, it is the amount an employer deducts from an employee’s salary to pay the liable tax of the employee to the government.

Need to Withhold Tax

• Helps tackle Base Erosion & Profit Shifting (BEPS) issues that drastically affect the tax base of a country.
• Eliminates hassles related to tax compliance to both IT authorities and non-residents (whose activities in the country may be temporary.)
• Seamless method of collecting tax from individuals that the government has significantly less control on like non-residents and foreign companies.

Withholding Tax Rate (for both Residents and Non-Residents)

All transactions do not fall under the same withholding tax rate and are actually charged based upon the nature of the transaction. Here are some withholding tax rates along with the details of transactions they are applicable on:

Section	Withholding Tax Rate & Applicability
Section 194LB	5 % withholding tax deducted on the amount of interest paid on loans borrowed by an infrastructure debt fund referred in Section 10(47), in foreign currency. Chargeability of such income falls under Section 115A for such incomes.
Section 194LC	5% withholding tax deducted on the amount of interest paid on money borrowed in foreign currency between 1 July 2012 and 1 July 2023 by an Indian Company or Business trust from a source outside India: •    Under a loan agreement, or •    By issuing long term bonds. Chargeability of such income falls under Section 115A.
Section 194LD	5% withholding tax deducted on the amount paid on: •    Government securities, or •    Rupee Denominated Bond (RDB) of an Indian company by an Indian company or Government to Foreign Institutional Investors (FII) or Qualified Foreign Investor and the interest is payable between 1 June 2013 and 1 July 2023 in foreign currency. Chargeability of such income falls under Section 115A.
Section 195	This section covers most of the transactions and prescribed rates that are not covered under any other section. Long Term Capital Gain: •    If gains fall under Section 112A – 10% •    If gains fall under Section 115E – 10% •    Other gains not covered – 20% (to be calculated by the deductor) Short Term Capital Gain: •    If gains fall under Section 111A – 15% Royalty & fees for Technical Services (other than those referred in Section 44DA): Such income paid to non-residents and foreign companies are chargeable under Section 115A at 10%, and withholding tax is deducted at the same rate. Note: This section does not apply if the foreign company has a permanent establishment (PE) in India. Interest on money borrowed in foreign currency: (Excluding the interest chargeable to withholding tax at the rates specified in sections 194LB, 194LC, 194LD) Such income is chargeable under Section 115A, and the withholding tax rate would be 20%. Any other transaction that has not been covered: 30% (40% in case of payments to foreign company).

Health & Education Cess – 4%

• Withholding tax must be deducted before payment or credited into the account of the payee (through entry in books of accounts).
• The deductor, i.e., the person responsible for deducting and paying the liable withholding tax can be any person (resident or non-resident). As per Section 195, non-residents shall deduct withholding tax if they have any business connection in India or not, and irrespective of whether they have a presence in India or not.
• Under Section 190, the tax rates shall be as per the Income Tax Act or the Double Taxation Avoidance Agreement (DTAA), whichever may be more beneficial to the assessee.
• Thus, if the non-resident has a permanent establishment (PE) in India and the non-resident’s country has a DTAA with India, the payable withholding tax will be much lower of the tax rates mentioned above or the tax rates of DTAA.

Withholding Tax Rate (for Non-Residents)

The applicable withholding tax rate is the lower of the rates specified in the Income Tax Act of 1961 or the relevant Double Taxation Avoidance Agreement (DTAA). Non-residents must pay taxes in India on their source income, which includes:

• Interest, royalties, and fees for technical services,
• Salary paid for services rendered in India, and
• Income arising from a business connection or property in India.

The rates for Withholding Tax on Payments to Non-residents under the Income Tax Act 1961 and different Double Taxation Avoidance Agreements are as below:

Nature of Income	Income Tax Rate*	DTAA with UK#	DTAA with USA#	DTAA with Germany#
Interest in foreign currency (subject to conditions)	5%	15%	15%	10%
Interest on money borrowed in foreign currency under a loan agreement or by way of long-term infrastructure bonds (or rupee-denominated bonds)	5%	15%	15%	10%
Interest on investment in long-term infrastructure bonds issued by Indian company (rupee denominated bonds or government security)	5%	15%	15%	10%
Interest payable on long-term bonds listed on IFSC	4%	15%	15%	10%
Non-specified type of interest	20%	10% or 15%	10% or 15%	10%
Royalty and technical fees	10%	10% or 15%	10% or 15%	10%
Dividend income	Company/ partnership Firm/ - 40% Individual – at applicable slab rates	10% or 15%	15% or 25%	10%
Dividend income from a company located in an IFSC	Company/ partnership Firm/ - 40% Individual – at applicable slab rates	10% or 15%	15% or 25%	10%
LTCG gains other than equity shares of a company or units of equity-oriented fund/business trust	20%	Capital gain arises as per Indian/UK Income tax Act	Capital gain arises as per Indian/USA Income tax Act	Capital gain arises as per Indian/Germany Income tax Act
LTCG on equity shares of a company or units of equity-oriented fund/business trust	10% (If listed on stock exchange)	Capital gain arises as per Indian/UK Income tax Act	Capital gain arises as per Indian/USA Income tax Act	Capital gain arises in the country of which the company (whose shares are sold) is resident
Other income	Company/ partnership Firm/ - 40% Individual – at applicable slab rates	Taxable as per the rates in force in the country in which such income arises	Taxable as per the rates in force in the country in which such income arises	Taxable as per the rates in force in the country in which such income arises

Surcharge Rates (Applicable to Both Residents and Non-Residents)

All the rates mentioned above are to be increased by the following:

Status of Foreign payee	Income Slab	Rate of Surcharge
Individual	More than 1 Crore - up to 10 Crore	2%
	More than 10 Crore	5%
Company	More than 50 Lakh -up to 1 Crore	10%
	More than 1 Crore – up to 2 Crore	15%
	More than 2 Crore – up to 5 Crore	25%
	More than 5 Crore	37%
Other Assessee	More than 1 Crore	12%

Withholding Tax: Compliances for Both Residents and Non-Residents

In International transactions, the following process is to be followed for withholding tax:

Determine the following details:

• The nature of income and the category it falls under the Income Tax Act and DTAA.
• If the payee has a PE in India.
• If the payee is entitled to avail of the DTAA benefits.
• The rate of tax liability.

Get the below-mentioned documents from the payee:

• PAN of the payee

Every person (other than an individual) who enters a financial transaction worth INR 250,000 (US$ 3040) or more is required to apply to a tax officer for a PAN. If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Income-tax Act, the rates in force, or the rate of 20 percent, whichever is higher.

• Tax Residency Certificate (TRC) of the payee.

The non-resident is under an obligation to provide the Tax Residency Certificate of their home country to claim the benefit of the Tax Treaty between India and his country of residence.  

• Declaration under the prescribed form of the Income Tax from the payee.
• Form 10F

According to Section 90(5) of the Income Tax Act of 1961, a non-resident must furnish certain details in Form 10F along with the Tax Residency Certificate (TRC) to claim the benefit of any Tax treaty in respect of any income earned in India.

Note: We have examined that in some of the cases, the actual rates of applicable taxes on non-residents are lower than the rate of withholding tax rate. Under such circumstances, the non-resident can either obtain a refund of the withholding tax or a low / no tax deduction certificate from the Income Tax Department.

Make and submit the below-mentioned documents:

• Get a certificate in Form No. 15CB from a Chartered Accountant (CA).
• Supply the information in Form 15CA and verify it in the prescribed way.
• A penalty of up to INR 1,00,000 may be charged for failing to supply or supplying incorrect information.

Deposit the Withholding Tax to the Income Tax Department as per the following:

S.No.	Particular	Due Date
1.	Tax deductible in any month from April - February	7th day of the next month
2.	Tax deductible in March	30th April

File the income tax return in the specified form to the Income Tax Department as per the following:

S. No.	Particular	Due Date
1	April – June	15th July
2	July – September	15th October
3	October – December	15th January
4	January - March	15th May

Refund of Withholding Tax in India

The non-resident individual or company can submit the income tax return in India to obtain a refund of the withholding tax return. The due date for filing of income tax returns is as below

• Individuals less than INR 10 Crore (USD 1,220,625): 31St July of the subsequent financial year
• Individuals more than INR 10 Crore (USD 1,220,625): 31St October of the subsequent financial year
• Company: 31St October of the subsequent financial year

The Income Tax Department examines the Income Tax return and post satisfaction provide the refund to the non-resident. In case of adverse order, the non-resident may approach the appellate authority for an appeal against Income Tax Order.   

Application for Lower or Nil Withholding Tax

The payer responsible for withholding taxes of the payee can apply to get a lower or nil withholding tax in the international transaction.

	Applicant	Purpose	Application Form
Application under Section 195(2)	Payer	To determine the adequate part of the sum chargeable to tax and liable for withholding tax	No prescribed form
Application under Section 195(3)	Payee	Application for Nil Withholding Tax in specific cases	Form No. 15C or 15D
Application under Section 197	Payee	Lower or Nil Withholding Tax	Form No. 13

After the submission, the Income Tax Department will examine the application and based on their findings of the examination, give the order for Nil or lower withholding tax.

Note: Foreign parties should have a Permanent Account Number (PAN) to apply for a low or Nil withholding tax.

Conclusion

Failing to comply with any type of tax rules and regulations, including those associated with Withholding Tax, may have drastic repercussions. It is imperative to familiarize yourself with the various aspects related to tax payments and deductions to ensure you are not failing to meet any legal expectation when it comes to financial rules and regulations. It is strongly suggested to pay all your taxes on time to avoid any unwanted consequences that may be faced on failing to do so.


We can assist you with Withholding Tax concerns in India. You can get in touch with us by submitting a query below.