A withholding tax is an amount of money deducted directly from your income or the income/revenue generated on the business that you would do with your Indian counterparts, or often by the employer; and sometimes by the financial institutions as well.
Withholding tax can also be understood as a government requirement from the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government.
There could be instances when some workers on contractual basis, international companies and freelancers do not pay a withholding tax.
Withholding tax for companies not registered in India and NRIs:
According to the Finance Act passed by the Parliament of India, the current rates of withholding tax for NRIs and foreign companies are as below:
1. Interest – 20 percent of gross amount
2. Dividends – 10 percent
3. Royalties – 20 percent
4. Technical services – 20 percent
5. Companies/corporates – 40 percent of net income
6. Any other services – individuals – 30 percent of net income
The above rates are general and in respect of the countries with which India does not have a double taxation avoidance agreement.
How to save withholding Taxes in India on the invoices raised?
After the amendment of April 1, 2010 every foreign company is required to furnish a permanent account number to the payer in India. The easiest and the best way for foreign companies to minimize withholding tax is to obtain a PAN Number from the Income Tax Department of India. If the recipient fails to provide the PAN, the withholding tax rate would be higher than the existing rate as per the ITA or treaty, or 20 percent.
PAN is also essential to avail any kind of reductions and rebates in the withholding tax rate as in the absence of a PAN, the tax authorities simply ignore the application from the recipient for a lower withholding tax rate.
It is thus highly recommended to every Indian and NRI to obtain a PAN if they have any financial transactions in India. It is certainly important for foreign companies to apply for a PAN if they are receiving any interest or royalties or fees from their Indian group companies.
FYI: The above information could be wrong and you are advised to get correct information from a reliable source or a professional. Believing in the above information is totally up to the reader’s discretion.