Tax deducted at the time of making a payment to a non-resident or on specified transactions, remitted directly to the government.
Withholding Tax is the broader international term for what India calls TDS (Tax Deducted at Source). It's a mechanism where the payer deducts tax from payments and remits it to the tax authority on behalf of the payee. This ensures tax collection at the point of income generation. In cross-border transactions, withholding tax rates are governed by Double Tax Avoidance Agreements (DTAA) between countries. Key Indian provisions: Section 195 (payments to non-residents), Section 194 series (domestic withholding). The payee claims credit for withheld tax when filing their return.
Indian company pays ₹10,00,000 to a US software company for license fees. Without DTAA: 10% withholding under Section 195. Under India-US DTAA: Royalty/FTS rate is 15% (or 10% for certain categories). Company withholds ₹1,00,000 (10%), pays ₹9,00,000 to US company, deposits ₹1,00,000 to Indian government. US company claims credit in US tax return.
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They're essentially the same concept. 'TDS' is the Indian terminology (Tax Deducted at Source). 'Withholding Tax' is the international term used globally. In practice, TDS refers to domestic deductions (Sections 192–196), while 'withholding tax' often refers specifically to cross-border payments (Section 195). The mechanism is identical — deduct tax at source and remit to government.
Yes. If a DTAA exists between India and the recipient's country, the LOWER of domestic rate or DTAA rate applies. To claim DTAA benefit, the non-resident must provide Tax Residency Certificate (TRC), Form 10F, and No PE declaration. Without these documents, the payer must apply domestic rates (which are usually higher). Always verify DTAA rates before making cross-border payments.
A system of collecting income tax at the source of income, where the payer deducts a percentage of tax before making payment to the payee.
A tax paid directly by an individual or organization to the government, where the burden cannot be shifted to another person. Examples include income tax, corporate tax, and capital gains tax.
The legal framework of laws, regulations, and filings that a business must adhere to, including tax filings, labor laws, corporate regulations, and industry-specific requirements.
A GST mechanism where the recipient of goods or services is liable to pay tax instead of the supplier, commonly applied to imports and specified goods/services.
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