What is Withholding Tax?A withholding tax, also called a retention tax, is a government requirement for the payer of anitem of income to withhold or deduct tax from the payment, and pay that tax to the government.In most jurisdictions, withholding tax applies to employment income. Many jurisdictions alsorequire withholding tax on payments of interest or dividends. In most jurisdictions, there areadditional withholding tax obligations if the recipient of the income is resident in a differentjurisdiction, and in those circumstances withholding tax sometimes applies to royalties, rent oreven the sale of real estate. Governments use withholding tax as a means to combat tax evasion,and sometimes impose additional withholding tax requirements if the recipient has beendelinquent in filing tax returns or in industries where tax evasion is perceived to be common.Typically the withholding tax is treated as a payment on account of the recipients final taxliability. It may be refunded if it is determined, when a tax return is filed, that the recipients taxliability to the government which received the withholding tax is less than the tax withheld, oradditional tax may be due if it is determined that the recipients tax liability is more than thewithholding tax. In some cases the withholding tax is treated as discharging the recipients taxliability, and no tax return or additional tax is required.The amount of withholding tax on income payments other than employment income is usually afixed percentage. In the case of employment income the amount of withholding tax is oftenbased on an estimate of the employees final tax liability, determined either by the employee orby the government.Withholding tax is an Income tax which is deducted at the source of the revenue. The party thatis subject to tax does not remit the withholding tax to the tax authorities himself.In any business transaction there are 2 parties involved. One is the customer and another is thevendor. A customer is authorized to deduct withholding tax for services rendered by the vendor.When the vendor raises the invoice on the customer, the customer deducts the withholding tax asper the rates specified by the tax authorities and pays the balance money to the vendor. The taxdeducted by the vendor is remitted to the tax authorities on specified due dates.The vendor gives a Withholding tax certificate to the customer for the withholding tax deducted.The customer can claim this withholding tax (as advance income tax paid) in his annual returnsto Income tax authorities.In some countries (like India) the withholding tax is deducted on Invoice or payment whicheveris earlier. Thus when an advance is paid to the vendor the customer is required to deductwithholding tax o n the advance payment.When the Vendor submits an Invoice the customer is now required to deduct tax on the Invoiceamount reduced by the advance amount.Withholding tax in IndiaChapter XVII-B of the Income Tax Act provides for deduction of tax at source on paymentsmade by any assessee. These provisions are also applicable in case of payment made to non-residents.
Section 195 casts an obligation on the person responsible for payment to non-resident to deducttax at source at the time of payment or at the time of credit of the sum to the account of the non-resident.Withholding tax for NRIs and foreign companiesWithholding Tax Rates for payments made to Non-Residents are determined by the Finance Actpassed by the Parliament for various years. The current rates are:Interest – 20 percent of gross amountDividends – 10 percentRoyalties – 20 percentTechnical services – 20 percentAny other services – individuals – 30 percent of net incomeCompanies/corporate – 40 percent of net incomeThe above rates are general and in respect of the countries with which India does not have adouble taxation avoidance agreement.Withholding tax in SAPTo calculate pay and report the withholding tax, the SAP system provides two functions:-Classic Withholding taxExtended Withholding taxExtended Withholding tax includes all the functions of classic withholding tax; SAP thereforerecommends the use of extended withholding tax.Withholding tax is applicable for accounts payable only but extended WT for AP and AR also &also this extended WT using several countries like India , Brazil, Mexico and USA.Withholding TaxClassic Withholding Tax (All release)Extended Withholding Tax (from release 4)Difference between the twoS.No Individual Function Classic -- Extended1 Withholding Tax on Outgoing payment Yes -- Yes2 TDS on Incoming payment x -- Yes3 TDS at the time of Invoice x -- Yes4 TDS on partial payment x -- Yes5 No. of withholding tax from each document Max 1 --Several6 TDS basis- Net amount Yes -- Yes-Gross amount Yes -- Yes-Tax amount x x -- Yes
7 Rounding rule x -- Yes8 Cash discount consideration x -- Yes9 Accumulation x -- Yes10 Minimum/Maximum amt and exemption x -- Yes11 Certification Numbering x -- Yes12 Calculation Formula Yes -- YesWithholding tax settings in SAP1. MAINTAIN COUNTRIES2. MAINTAIN TYPES OF RECIPIENT3. DEFINE WITHHOLDING TAX TYPE FOR INVOICE POSTING4. DEFINE WITHHOLDING TAX TYPE FOR PAYMENT POSTING5. DEFINE WITHHOLDING TAX CODES6. DEFINE FORMULAS FOR CALCULATING WITHHOLDING TAX6.1. FORMULAS FOR CALCULATING WITHHOLDING TAX7. ASSIGN WITHHOLDING TAX TYPES TO COMPANY CODES8. ACTIVATE EXTENDED WITHHOLDING TAX9. DEFINE ACCOUNTS FOR WITHHOLDING TAX TO BE PAID OVER10. ASSIGN WITHHOLDING TAX TO VENDOR MASTER11. POSTING OF INVOICE