India: Withholding Tax
The Indian Constitution has empowered only the Central Government to levy and collect taxes. Every person whose total income exceeds the maximum exemption limit shall be chargeable to the income tax at the rate or rates prescribed in Income Tax Act. Such income tax shall be paid on the total income of the previous year in the relevant assessment year. But the total income of the individual is determined on the basis of the residential status in India.
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
182 days or more in previous year
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.
Withholding tax – Introduction
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.
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.
The tax is to be deducted at the rate prescribed in the Act or rate specified in Double Taxation Avoidance Agreement whichever is beneficial to the assessee.
Any person making a payment to any non-resident shall be liable to deduct tax at the rates specified.
Rates of Withholding Tax
Current rates for withholding tax for payment to non-residents are:-
1. Interest: 20 %
2. Dividends paid by domestic companies: Nil
3. Royalties: 10%
4. Technical Services: 10%
5. Any other services:
Individuals: 30% of the income
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).
Assessment of the Non Resident Assessee through ‘Agent’
Person treated as ‘agent’
A non resident assessee may be assessed directly or through non resident. Persons who may be treated as ‘agent’ of assesee of non resident are as follows:
employee or trustee of the non resident;
any person who has any business connection with the non resident;
any person from or through whom the non resident is in receipt of any income;
any person who has acquired a capital asset in India from non resident.
Opportunity of being heard and any representation from him is considered before treated him as an ‘agent’ of non resident.
