Withholding Tax in India : Foreign Companies & Non- Resident Individuals

Why withholding tax?

1. It is mode of collection of tax from the non-residents & foreign companies on which the govt. has very limited or no control.
2. It helps to detect and protect department from the problem of BEPS (Base Erosion & Profit Shifting) due which the tax base of the country erodes.
3. Avoids unnecessary hassles involving tax compliance to both IT authorities and non-residents (whose activities in India may be temporary or transient).

Rate of withholding tax

There is not a single rate of withholding tax for all the transactions rather the rate depends on the nature of transaction. Following are some of the rates along with respective transaction:

• Under a loan agreement; or
• By way of issue of long-term bonds

       C.    Section 194LD– Withholding tax is to be deducted at rate of 5% on the amount of interest paid on

• Rupee Denominated Bond (RDB) of an Indian Company; or
• Govt. Security by an Indian company or Indian government to Foreign Institutional Investors (FII) or Qualified Foreign investor and the interest is payable between 01/06/2013 and 01/07/2023 in foreign currency (the chargeability of such income is under section 115A)

1. Long Term Capital Gain – if the gains are covered u/s 112A (sale of listed securities in excess of Rs.1L) – 10% [with effect from 23rd July 2024 sale of listed securities above INR 1,25,000 is taxable @ 12.50%], if the gains are covered u/s 115E – 10% [with effect from 23rd July 2024, at 12.50%] other gains not covered – 20% [with effect from 23rd July 2024, at 12.50% without giving any effect of cost indexation] (such gains are to be calculated by the deductor).
2. Short Term Capital Gain – if the gains are covered u/s 111A – 15%, at 20%.
3. Interest on moneys borrowed in foreign currency - [excluding the interest chargeable to withholding tax at the rates specified in above section 194LB, 194LC, 194LD]. Such income is chargeable to tax in India u/s 115A and the withholding tax rate on such interest is 20%.
4. Royalty & fees for technical services [other than referred in section 44DA i.e. – u/s 115A such income paid to Non-Residents or foreign companies are chargeable to tax in India at a rate of 20% and withholding tax is to be deducted on the at the same rate. However, if such foreign company has a PE (permanent establishment in India, this section does not apply, and such PE is taxed as Indian Company).
5. Any other transaction not covered – 30% (40% - in case of payment to foreign Company).

• 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- upto 10 Crore	2%
	More than 10 crore	5%
Company	More than 50 Lakh-upto 1 Crore	10%
	More than 1 Crore- upto 2 Crore	15%
	More than 2 Crore- upto 5 Crore	25%
	More than 5 crore	37%
Other Assessee	More than 1 crore	12%

• The time for deduction of withholding tax shall be earlier of payment or credit into account of the payee (by entry into books of accounts)

• The deductor i.e. the person paying the amount liable for withholding tax under this section can be any person (resident or non-resident) [as per explanation to Section 195, a non-resident shall also deduct withholding tax irrespective whether it has any business connection in India or not and irrespective whether it has any presence in India or not].

• Also, under section 190 – the rates of tax shall be as per the income tax act or the DTAA (Double Taxation Avoidance Agreement) whichever is more beneficial to assessee. In case, the country of non-resident has a DTAA with India and the non-resident has a PE in India (for foreign company) , the withholding tax then will be lower of the DTAA tax rates or above tax rates. Below are the DTAA rates for a few countries:

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	20%	10% or 15%	Not Covered under DTAA	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% [12.50% w.e.f. 23/Jul/2024]	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) [12.50% w.e.f. 23/Jul/2024]	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
STCG gains other than equity shares of a company or units of equity-oriented fund/business trust	Company/ partnership Firm/ - 40%, Individual – at applicable slab rates	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
STCG on equity shares of a company or units of equity-oriented fund/business trust	15% (If listed on stock exchange) [20% w.e.f. 23/Jul/2024]	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

*The rates as per income tax Act are to be increased by the prevailing Surcharge & Cess

# The rates as per DTAA are fixed and no impact of Surcharge or Cess to be given

Application for the Lower or Nil Withholding Tax

The payer of payee can also apply to the Income Tax Department, to obtain a lower or Nil Withholding Tax in the International Transaction

Particular	Application under Section 195(2)	Application under Section 195(3)	Application under Section 197
Applicant	Payer	Payee	Payee
Purpose	To determine appropriate portion of sum chargeable to tax and liability for withholding tax	Application for Nil Withholding Tax in Specified Cases	Lower or Nil Withholding
Application Form	No prescribed Form	Form No. 15C or 15D	Form No. 13

The Income Tax department shall examine the application the application and based on the examination, provide the order of nil or lower withholding tax. It is also important to mention that foreign party should have a PAN before making the application of low or nil withholding tax.

Refund of Withholding Tax in India

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

• Individuals less than INR 100 million (Appx USD 1,194,364): 31st July of the subsequent financial year
• Individuals more than INR 100 million (Appx USD 1,194,364): 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.  

Note: Refund can only be obtained in case the Foreign resident/Foreign company claim the income to be lower than the income on which withholding tax is deducted and further the Interest, Royalty and Technical service income taxed at lower rates are not applicable for claiming refund (in case the individual/company has income only from such sources then they are not obliged to file the income tax return in India).

Tax Compliance - Withholding Tax

The following procedure will be followed for the Withholding Tax in the International Transaction:

1.    Determine the following Information:

• Ascertain the nature of income & categorization under the Income Tax Act and DTAA with the respective country
• Check if the payee has a Permanent Establishment in India
• Determine whether the payee is entitled to avail the DTAA Benefits
• Determine the Rate of Tax Liability

2.    Obtain the following documents from payee:

• Obtain the Permanent Account Number (PAN) of the Payee
• Obtain the Tax Residency Certificate (TRC) of the Payee
• Obtain Declaration from payee under the Prescribed form (form-10F)  of the Income Tax Act (for availing rates as per tax treaty)

3.    Prepare and submit the following documents:

• Obtain certificate in Form No. 15CB from a Chartered Accountant
• Furnish the information in Form 15CA and verified in the manner prescribed.
• Penalty of not furnishing the information or furnishing incorrect information shall be upto Rs. 1,00,000

4.    Deposit the Withholding Tax to the Income Tax Department as follows:

S.no	Particular	Due Date
1.	Tax deductible in April – February	7th day of Next Month
2.	Tax deductible in March	30th April

5.    File the income tax (TDS/withholding tax) return in the prescribed form to the Income Tax Department as follows:

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

Consequences of Non- compliance

A.    Consequences of late – payment/late – deduction: [Section 201(1A)]

• Late deduction: Person is liable to pay an interest @ 1% per month or part thereof calculated from the date from which tax was due to be deducted up to the date till which tax is deducted.

• Late payment: Person is liable to pay an interest @ 1.5% per month or part thereof calculated from the date from which tax was due to be paid up to the date till which tax is paid.

B.    Consequences of non – payment/non – deduction: [Section 201(1)]

• u/s 40 (a) (i), the person paying such amount cannot claim such payment as expense from its taxable income
• Person is deemed as “Assessee in default” under section 220 and liable to interest as per provisions of section 220 @ 1% per month or part thereof and
• Person is also liable to penalty as per provisions of section 221 which can be maximum up to the amount of TDS not paid/ Deducted
• U/s 276B: Punishable with rigorous imprisonment for a term which shall not be less than three months, but which may extend to seven years and with fine.
• Exception: Person who fails to deduct (not the one who fails to pay to govt.) shall not be liable to Penalty as per point (2) & imprisonment as per point (3) above if he obtains a certificate to this effect from a Chartered Accountant that the deductee (the person of who TDS was to be deducted)

C.    Consequences of non-filing of TDS/withholding Tax return:

• U/S 234E – late fees of Rs. 200 per day up to a maximum of amount of TDS payable

• U/s 271H – penalty of Rs. 10,000 up to Rs. 1 lakh can be levied if there is a delay in filing return or incorrect information is furnished. However, if the deductor files the return before the expiry of a period of one year from due date of filing of return and has paid late fees and interest (if any) then such penalty shall not be levied.

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