Withholding tax is income tax withheld from employees’ wages and paid directly to the government by the employer, and the amount withheld is a credit against the income taxes the employee must pay during the year.
The following are the different types of withholding taxes in the Indian Tax System:
Interest paid to a Non-Resident on a foreign currency borrowing or a debt is generally subject to 20% withholding tax plus the applicable surcharge and cess. However, the rate may be reduced under a tax treaty.
In absence of a tax registration number, the applicable tax treaty rate or 20% (whichever is higher) shall be applicable.
Royalty/Fees for Technical Services paid to a Non-Resident are subject to a basic gross withholding tax rate of 10%, plus the applicable surcharge and cess. The rate may be reduced under a tax treaty.
No withholding tax applies on dividends as dividends declared by an Indian Company are tax free for all shareholders.
Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxation.
In general, if the relevant treaty specifies the same or lower rate for withholding, these treaty rates, which are more beneficial for the non-resident recipient, may be applied. To claim treaty benefits, the non-resident recipient must obtain a Tax Residency Certificate indicating that they are a resident of that country or specified territory.