11/15/2017 Withholding tax explained with example - sap concept hub

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Withholding tax explained with example

What is withholding tax?

Withholding tax (WTH) is tax deducted at source or also referred as retention tax.

A (PAYER) -------->----B (RECEIVER)

As per income tax law,

Payer A has to deduct (withhold) a portion of tax before making payment to receiver B.

Payer is supposed to issue WTHtax certificate to receiver B after deducting WTH tax.

Payer is supposed to pay the withhold tax amount to tax authority.

Payer is supposed to file WTH tax returns to tax authority.

Base amount for calculating withholding tax amount? Example

WTHtax amount is calculated by applying a particular percentage rate on base amount.

Base amount for applying WTHtax percentage is always GROSS AMOUNT.

Example:

Company purchases raw material from vendor of 1000 with 20% input tax.

Gross amount = 1000 (net amount)+ 200 (tax)== 1200

Net amount = 1000 and tax amount = 200

As we know WTHtax percentage is applied on gross amount. If withholding tax 10% is to be applied on above transaction then

WTHtax = 10% on gross amount = 10% on 1200 = 120

Vendor will be paid = 1200- 120 (withholding tax) = 1080

Withholding tax percentage is declared by income tax authority.

Income tax department has declared different tax percentage for different scenarios (nature of payment/ receiver is residential or non-residential/ receiver is
individual or HUF or company).

Lets try to understand how applicable WTHtax rate is decided for a transaction:

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Above mentioned is just few example of income tax act, there are many more sections in income tax act.

As shown above, applicable tax percentage is decided on the basis of:

Nature of payment:

Interest income other than security/Payment to contractor/Insurance commission/Brokerage/Rent/Professional & technical services etc.

Recipient (receiver or payee) is residential or non-residential

Different WTHtax rate is applied on transaction depending upon if the recipient is residential or non-residential.

Recipient (receiver or payee) is individual or HUF (Hindu Undivided Family) or other.

Different WTHtax rate is applied on transaction depending upon recipient is company or others.

Lower tax rate as decided by accessing officer

Receiver fills form 13 and submits to accessing officer along with relevant documents. If assessing officer is satisfied, form 13 for lower withholding tax rate is
approved.

Receiver presents approved form 13 to payer so that payer deducts WTHtax amount at lower rate.

If receiver does not presents PAN to payer

A residential receiver is supposed to provide PAN to payer, If PAN is not provided then tax applicable will be 20%.

Overall, WTHtax rate depends upon nature of transaction, recipient is residential or non-residential, recipient is company or other than company.

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Withholding tax remittance process

Payer who deducted WTHtax amount is supposed to pay the amount to its local tax authority. Each state has its own local tax authority.

Tax payment has to be done on or before 7th of the next month.

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