Withholding tax, also known as retention tax, is a tax that is deducted at the source of income. It is typically levied on payments made by one entity to another, and the payer is responsible for withholding a certain percentage of the payment and remitting it directly to the government. The withheld amount is then credited against the payee's final tax liability.
Withholding tax is a mechanism used by governments to ensure that they can collect taxes on income generated within their jurisdiction, even if the recipient of the income is a non-resident or a foreign entity. The concept is prevalent in various types of income, including interest, dividends, royalties, and payments for services.
Here are common types of income subject to withholding tax:
Interest Payments: Withholding tax may be applied to interest payments made by a payer (such as a bank or a corporation) to the recipient of the interest income.
Dividends: When a company pays dividends to its shareholders, a withholding tax may be deducted from the dividend payment.
Royalties: Payments for the use of intellectual property, such as patents, copyrights, or trademarks, may be subject to withholding tax.
Wages and Salaries: In some jurisdictions, a portion of an employee's salary or wages may be subject to withholding tax.
Services: Payments for services, particularly those rendered by non-residents, may be subject to withholding tax.
In India, the types of payments subject to withholding tax include:
Purchase of goods: A withholding tax rate of 0.1% applies when making payments for the purchase of goods, with a payment threshold of 5 million INR.
Interest: There are different withholding tax rates for specified and non-specified types of interest. For specified types, the withholding tax rate is 10%, and for non-specified types, it is also 10% with a threshold of 5,000 INR.
Professional services: Payments for professional services are subject to a withholding tax rate of 10% with a payment threshold of 30,000 INR.
Technical services: A withholding tax rate of 2% applies to payments for technical services, with a payment threshold of 30,000 INR.
Royalties or fees for technical services (FTS): Payments for royalties or fees for technical services are subject to a withholding tax rate of 10% with a payment threshold of 30,000 INR.
Other payments: Withholding tax also applies to payments such as rent, commission, and salary for professional services, at rates specified in India's tax regime.
These withholding tax rates and thresholds are applicable to both resident and non-resident companies, and the rates may be further governed by Double Taxation Avoidance Agreements (DTAAs) between India and other countries.
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