The Supreme Court (SC) recently held that without an express notification, the companies cannot, automatically, claim lower withholding tax of 5%, even if provided for in the Direct Tax Avoidance Agreement (DTAA).
Withholding tax is withheld or deducted from certain types of income, such as wages, dividends, interest, and royalties, when they are paid to the recipient (non-resident individual).
It Is also known as Retention tax.
The purpose of withholding tax in India is to ensure that the government receives a portion of the income tax owed by the recipient.
Withholding tax is applicable in the case of payments made to non-resident individuals.
If the income is paid in India, the person responsible for payments to NRI must deduct the withholding tax at the time of payment or when the amount is credited to the NRI’s account, according to Section 195 of the Income Tax Act.
The amount of withholding tax in India depends on the type of income, the amount of income earned, and the tax laws of the country where the income is earned.
The tax rate is decided as prescribed in the Income Tax Act, 1961, or Double Taxation Avoidance Agreement (DTAA), whichever is lower.
The central government of India collects this tax.
India has signed DTAAs with many countries to avoid taxing individuals twice for the same income
Currently, India has DTAA treaties with more than 80 countries around the world.