Withholding tax, known as Tax Deducted at Source (TDS) in India, aims at collecting revenue at the very source of income. Its significance to the government lies in the fact that this tax is collected in advance. It ensures a regular source of revenue, provides for a greater reach and widens the tax base.
The ITA requires the taxpayer to withhold tax at source at:
- The appropriate rate considering the nature of payment and status of the recipient (i.e., corporate or non-corporate assessee)
- The time of payment or credit of the amount, whichever is earlier, except salary payments where tax is required to be deducted only on the actual payment of salary.
Please see Appendix 1 for TDS rates on payments made to non-residents and foreign companies and Appendix 2 for TDS rates on some common payments to residents.
If the rates prescribed in a tax treaty are lower than the rates in the table in Appendix 1, the lower prices can be adopted.
A person availing the treaty benefit is required to furnish the Tax Residency Certificate (TRC) as stated earlier and is also required to give a declaration in the specified form.
If the recipient does not have a PAN in India, TDS would be the maximum of the:
- Tax rate prescribed in the ITA
- Rates in force (i.e., tax rate specified in the Finance Act or the rate specified in the treaty, whichever is lower)
- However, with effect from 1 June 2016, this higher withholding tax rate of 20% will not apply to non- residents, provided such non-resident furnishes contact details, TRC, Tax Identification Number (TIN), etc. to the taxpayer.
The person deducting the tax has a tedious compliance burden post deduction of tax, namely :
- In case of expenses other than salary, deposit the tax within seven days from the end of the month in which tax has been deducted, except in the case of tax deduction for the month of March. With respect to tax deducted in March, the due date of payment is 30 April
- With respect to TDS on salary, the same timeline as specified above applies, except that even for the month of March, tax needs to be deposited by 7 April
- Apart from the deposit of taxes, a corporate is required to file the statement of TDS on or before the last day of the month succeeding each quarter, specifying the details of taxes paid and the deductees on whose behalf the taxes were paid. However, for the quarter that ends in March, the due date is 31 May.
This statement is required to be filed separately in three different forms for salary payments, payments to non-residents, and all other payments.
- A corporate is also required to issue a TDS certificate to the persons from whose payments the tax has been deducted within the specified time.
There are stringent penal provisions, including prosecution, for not complying with these TDS provisions.