There is an obligation on the payer (either resident or non-resident) of income to withhold tax when certain specified payments are credited and/or paid. Some of the expenses that require WHT are as follows.
Payments to resident companies
|Nature of payment||Payment threshold for WHT (INR) (1)||WHT rate (%)|
|Specified type of interest||None||10 (6)|
|Non-specified type of interest||5,000 (2,3)||10|
|Professional service||30,000||10 (9)|
|Royalty or FTS||30,000||10 (8)|
|Royalty for sale, distribution, or exhibition of cinematographic films||30,000||2|
|Commission and brokerage||5,000||5|
|Rent of plant, machinery, or equipment||180,000||2|
|Rent of land, building, or furniture||180,000||10|
|Contractual payment (except for individual/HUF)||30,000 (single payment); 100,000 (aggregate payment)||2|
|Contractual payment to individual/HUF||30,000 (single payment); 100,000 (aggregate payment)||1|
|Payments by individual/HUF not covered under sections 194C/194H/194J||5 million||5|
|Dividend income on shares||5,000||10|
|Dividends for units of mutual fund||5,000||10|
|Purchase of immovable property||5 million||1|
|Cash withdrawal from bank or banking company (4)||10 million||2|
|Payments to an e-commerce participant, in relation to sale of goods or services facilitated by e-commerce operator through digital platform (5)||-||1 (5)|
- As a part of relief measures due to COVID-19 impact, the government has provided for reduced WHT rate by 25% in case of payments to residents between 14 May 2020 to 31 March 2021. Hence, the existing rates will be reduced by 25% (i.e. if WHT rate is 10% as per the section, it will be read as 7.5% in case payment is made between 14 May 2020 to 31 March 2021).
- Payments have different threshold limits. The payer is only required to withhold tax if the total payment within a tax year to a single person (except where specified otherwise) is above the limits specified above.
- The threshold limit for WHT for non-specified type of interest is INR 5,000, except in the case of interest received from a bank or deposit with post office, for which it is INR 10,000. This threshold limit is increased to INR 50,000 in case of interest provided by a co-operative society, and INR 40,000 if recipient of interest is a senior citizen (i.e. age of more than 60 years).
- Where the cash has been withdrawn by any person who has not filed return of income for three immediately preceding financial years, the threshold of INR 10 million will be read as INR 2 million and tax shall be deducted at 2% on amount exceeding INR 2 million but not exceeding INR 10 million and 5% on amount above INR 10 million.
- WHT obligations will not arise in case of individual or HUF where transaction value does not exceed INR 0.5 million, provided such individual or HUF furnishes its PAN/Aadhar. This provision is applicable with effect from 1 October 2020. Further, payments covered under this provision shall not be doubly taxed under any other provision of the tax law.
- 5% in case PAN/Aadhar is not available.
- Interest under Government of India saving (taxable) bonds, 2018 is allowed as a deduction at the time of making payment of interest on such bonds to residents. The threshold limit is less than or equal to INR 10,000.
- The definition of ‘royalty’ also includes consideration for use of, or right to use, computer software. Transfer of all or any rights in respect of any right, property, or information includes transfer of all or any right to use computer software (including granting of a licence), irrespective of the medium through which such a right is transferred and irrespective of whether any right or property is located in India. Hence, while applying WHT on such payments in the nature of royalty, one needs to consider the definition of royalty as amended by the Finance Act, 2012 with retrospective effect from 1 June 1976. Further amendment in definition of royalty is brought in by Finance Act, 2020 to include consideration for sale, distribution, or exhibition of cinematographic films within its ambit.
- 2% in case the company is engaged in business of operation of call centres.
Important point for consideration:
Finance Act 2021 has prescribed a levy of higher TDS and TCS on non-filers of income-tax return. Accordingly, higher TDS will be applicable to those having interest income, dividend income, annuity pensions, income from capital gains. However, this higher TDS will only apply to a specified category of non-filers of return. Further, this new section shall not apply where the tax is required to be deducted in case of salaries, provident fund, winning from lottery etc., winning from horse rates, income received from a securitization trust or cash withdrawal exceeding INR 2 million. As per the provisions under the Indian Income-tax Act, the higher TDS rate applied will be the higher of anyone of the following:
- twice the rate specified in the relevant provision of the Indian Income-tax Act; or
- twice the rate or rates in force; or
- the rate of five percent.
Application for permanent account number (PAN)
Every person (not being an individual) who enters into a financial transaction of an amount aggregating to INR 250,000 or more shall be required to apply to a tax officer for a PAN.
If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Income-tax Act, the rates in force, or the rate of 20%, whichever is higher.
Payments to non-resident companies
|Nature of payment||WHT rate (%)|
|Interest on foreign currency (subject to conditions)||5|
|Interest on money borrowed in foreign currency under a loan agreement or by way of long-term infrastructure bonds (or rupee denominated bonds)||5|
|Interest on investment in long-term infrastructure bonds issued by Indian company (rupee denominated bonds or government security)||5|
|Interest payable on long-term bonds listed on IFSC||4|
|Non-specified type of interest||20|
|Royalty and technical fees||10|
|Long-term capital gains other than equity shares of a company or units of equity oriented fund/business trust on which STT is paid||20|
|Long-term capital gains on equity shares of a company or units of equity oriented fund/business trust on which STT is paid||10|
|Income by way of winning from horse races||30|
- Percentage to be increased by a surcharge and health and education cess to compute the effective rate of tax withholding.
- Income from units of specified mutual funds received on or after 1 April 2020 is now taxable in the hands of the unit-holders.
- Dividends received from Indian companies prior to 1 April 2020 are tax-free in the hands of the shareholder. Any dividends received post 1 April 2020 are chargeable in the hands of the non-resident shareholder at the rate of 20% or treaty rate, whichever is beneficial.
- Short-term capital gains on transfer of shares of a company or units of an equity-oriented fund would be taxable at 15% if they have been subjected to STT.
- There is no threshold for payment to non-resident companies up to which no tax is required to be withheld.
- If the PAN of the deductee is not quoted, the rate of WHT will be the rate specified in relevant provisions of the Act, the rates in force, or the rate of 20%, whichever is higher. The government has notified rules that do not mandate quoting of PAN, subject to certain conditions.
- The payer is obligated to report specific information in the prescribed form (whether or not such payment is chargeable to tax).
- Where taxes are withheld as per the rates provided above with respect to dividend, interest, royalty, or FTS and there is no other income chargeable to tax in the hands of the non-resident, then compliance obligations relating to filing of return of income by such non-resident in India are not required.
Tax collection at source on sale of goods
The Finance Act, 2020 has introduced provisions for tax collection at source for sale of goods at the rate of 0.1% on transactions for sale of goods exceeding INR 5 million effective from 1 October 2020. These provisions are applicable only if the turnover/gross receipts of seller in the immediately preceding year does not exceed INR 100 million. Further, where PAN/ Aadhar is not provided by buyer, tax shall be collected at the rate of 1%. This provision will not apply where seller exports goods out of India or buyer is importing goods into India or the said transaction is already covered under any other provision of tax laws.
Action Plan 1 (Digital Economy) of the OECD’s BEPS project discussed several options to tackle direct tax challenges in the digital environment. Taking cues from this, an equalisation levy is available, the summary of which is as follows:
- Rate of levy: 6% of the amount of consideration for specified service.
- Meaning of ‘specified service’: Online advertisement, any provision for digital advertising space, or any other facility or service for the purpose of online advertisement, which includes any other service as may be notified by the Central Government in this regard.
- On whom: Non-resident receiving consideration for specified services from:
- a person resident in India and carrying on business or profession, or
- a non-resident having a PE in India.
- Exemption from income tax: The income arising to the non-resident from the specified service and chargeable to an equalisation levy will be exempt from income tax.
- With effect from 1 October 2020, equalisation levy is extended to include transactions where consideration exceeding INR 20 million is received/receivable by a non-resident ‘e-commerce operator’ for ‘e-commerce supply or services’ made/provided/facilitated on or after 1 October 2020. Rate of equalisation levy on such transactions shall be at the rate of 2%. This shall include the following transactions where services are provided by e-commerce operator to:
- a person resident in India
- a non-resident in specified circumstances, or
- a person who buys goods/services using an IP address located in India.
- Due date for deposit: Seventh day of the following month.
- Interest at the rate of one percent for every month shall be payable where the equalisation levy collected is not credited within the due date of payment.
- Penalty will be levied for failure to withhold or deposit equalisation levy or failure to furnish statement.
- Non-applicability in specified cases: Equalisation levy will not be charged in the following cases:
- The non-resident providing specified service has a PE in India and the specified service is effectively connected with the PE.
- The aggregate consideration received or receivable in the previous year by the non-resident does not exceed INR 100,000.
- The payment for the specified service by the Indian resident or PE is not for conducting business or a profession in India.
The Finance Act, 2021 has amended the provisions of equalisation levy to clarify that “online sale of goods” and “online provision of services” shall include one or more of the following online activities:
- Acceptance of offer for sale;
- Placing the purchase order;
- Acceptance of the Purchase order;
- Payment of consideration; or
- Supply of goods or provision of services, partly or wholly
Consideration received or receivable from e-commerce supply or services shall include:
- Consideration for sale of goods irrespective of whether the e-commerce operator owns the goods; and
- Consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator.
In addition to the above, it has been provided that the consideration taxable as royalty or fees for technical services will not be subjected to Equalisation levy.
These amendments will take effect retrospectively from 1 April 2020.
Some tax treaties provide for lower WHT rates from certain types of income, as follows:
|Dividend (1)||Interest||Royalty (10)||Fee for technical services (10)|
|Australia||15||15||10 (2)/15||10 (2)/15|
|Bangladesh||10 (3)/15||10||10||N/A (4)|
|Brazil||15||15 (19)||25 (13)/15||15|
|Bulgaria||15||15 (19)||15 (6)/20||20|
|Canada||15 (3)/25||15 (19)||10 (2)/15||10 (2)/15|
|China (People’s Republic of China)||10||10 (19)||10||10|
|Chinese Taipei (Taiwan)||12.5||10||10||10|
|Czech Republic||10||10 (19)||10||10|
|Denmark||15 (7)/25||10 (9)/15||20||20|
|Egypt||N/A (4)||N/A (4)||N/A (4)||N/A (4)|
|France||10 (5)||10/15 (5)||20 (5)||10 (5)|
|Greece||N/A (12)||N/A (12)||N/A (12)||N/A (4)|
|Hong Kong (entered into force)||5||10||10||10|
|Hungary||10 (5)||10 (5, 19)||10 (5)||10 (5)|
|Indonesia||10||10 (19)||10||N/A (4)|
|Italy||15 (3)/25||15 (19)||20||20|
|Korea, Republic of||15||10||10||15|
|Libya||N/A (12)||N/A (12)||N/A (12)||N/A (4)|
|Mauritius||5 (3)/15||7.5 (12)||15||N/A (4)|
|Nepal||5 (3)/10||10||15||N/A (4)|
|New Zealand||15||10 (19)||10||10|
|Oman||10 (3)/12.5||10 (19)||15||15|
|Philippines||15 (3)/20||10 (11)/15||15 (20)||N/A (4)|
|Russian Federation||10||10 (19)||10||10|
|Saudi Arabia||5||10||10||N/A (4)|
|Singapore||10 (7)/15||10 (9)/15||10||10|
|Spain||15||15 (19)||10 (5)/20||20 (5)|
|Sri Lanka||7.5||10||10||10 (5)|
|Sweden||10 (5)||10 (5, 19)||10 (5)||10 (5)|
|Syria||5 (3)/10||10||10||N/A (4)|
|Tajikistan||5 (3)/10||10||10||N/A (4)|
|Tanzania||5 (3)/10||10||10||N/A (14)|
|Thailand||10||10 (19)||10||N/A (4)|
|Trinidad & Tobago||10||10||10||10|
|United Arab Emirates||10||5 (9)/12.5||10||N/A (4)|
|United Kingdom||10/15 (16)||10 (11)/15||10 (2)/15||10 (2)/15|
|United States||15 (3)/25||10 (17)/15||10 (18)/15||10 (18)/15|
|Zambia||5 (8)/15||10||10||N/A (4)|
- The treaty tax rates on dividends are not relevant for dividends received up to 31 March 2020 since under the earlier Indian tax legislation, most dividend income from Indian companies that is subject to DDT is exempt from income tax in the hands of the recipient. However, this scenario has changed since DDT is abolished and tax is now levied in hands of recipient of dividend income with effect from 1 April 2020.
- 10% for the use of or right to use any industrial, commercial, or scientific equipment; and in other cases:
- During the first five years of the agreement:
- 15% if the payer is the government or specified organisation.
- 20% in any other case.
- Subsequent years: 15% in all cases.
- During the first five years of the agreement:
- If at least 10% of capital is owned by the beneficial owner (company) of the company paying the dividend or interest.
- In absence of specific provision, it may be treated as business profits or independent personal services under respective treaties, whichever is applicable.
- The ‘most favoured nation’ clause is applicable. The protocol to the treaty limits the scope and rate of taxation to that specified in similar articles in treaties signed by India with an OECD-member country or another country.
- If royalty relates to copyrights of literary, artistic, or scientific work.
- If at least 25% of capital is owned by the beneficial owner (company) of the company paying the dividend.
- If at least 25% of capital is owned by the company during at least six months before date of payment.
- If paid on a loan granted by a bank/financial institution.
- The tax rate for royalties and fees for technical services, under the domestic tax laws, is 10%. This rate is to be increased by a surcharge at 2%/5% on the income tax (based on taxable income) and health and education cess of 4% on the income tax including surcharge. As a consequence, the effective tax rate is 10.608%/10.92%. This rate applies for payments made under an agreement entered into on or after 1 June 2005. Accordingly, a tax resident can either use the treaty rate or domestic tax rate, whichever is more beneficial.
- If interest is received by a financial institution.
- Taxable in the country of source as per domestic tax rates.
- If royalty payments arise from the use or right to use trademarks.
- Tax treaties of certain countries do not have a separate clause specifying the WHT rate for fees for technical services and fees for included services.
- 5% if the beneficial owner is a company holding at least 10% of share capital; 15% in other cases.
- 15% of gross amount of dividend in case such dividend is paid out of income derived from immovable property and such income is exempt from tax. 10% in all other cases.
- 10% if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company).
- 10% if payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment and fee for included services that are ancillary and subsidiary to the enjoyment of the property for which payment is received.
- Dividend/interest earned by the government and certain institutions, like the Reserve Bank of India, is exempt from taxation in the country of source.
- If it's payable in pursuance of any collaboration agreement approved by the Government of India.
List of limited agreements between India and other countries
A list of the countries with which India has entered into limited agreements for double taxation relief with respect to income of airlines/merchant shipping, is given here.
|Afghanistan||Lebanon||People Democratic Republic of Yemen|
|Ethiopia||Maldives||Yemen Arab Republic|
Tax information exchange agreements (TIEAs) between India and other countries
A list of the countries with which India has entered into TIEAs for effective exchange of information relating to tax matters is given below. In addition, several of the comprehensive treaties signed by India have an information exchange clause that has the same effect as signing of a TIEA. These are not listed here.
|Bahrain||Isle of Man||Saint Kitts and Nevis|
|Bermuda||Principality of Liechtenstein||Seychelles|
|British Virgin Islands||Principality of Monaco|