What is withholding tax?

Withholding Tax is an obligation on the payer to withhold tax at the time of making payment under specified head such as rent, commission, salary, professional services, contract, capital gains etc. at the rates specified in tax regime. The obligation to withhold and pay tax is with the person or entity who gives the payment to the beneficiary.

For example, consider the Vodafone case. The argument of Revenue (Department) was that Vodafone should have withheld the tax for the capital gains made by Hutch. Hutch obtained the telecom firm at a lower price (in the past) and sold it to Vodafone at a higher price. Hutch thus made capital gains. A capital gains tax at the rate of 20% was applicable in this transaction according to the Revenue (Department). This capital gains tax should have deducted by (withheld) by Vodafone while paying money to Hutch. Hence the responsibility to withheld tax lies with the payer (Vodafone) and not with the seller (Hutch, who made the gain).

Similarly, the tax for payment of royalty, interest, salary etc should be withheld by the payer. Current rates for withholding tax for payment to non-residents are:-Interest- 20 %, dividends paid by domestic companies- nil, royalties- 10%, technical Services- 10%, any other services: for individuals – 30% of the income, for Companies –  40% of the net income.