Context
The government and the Reserve Bank of India are reportedly examining a reduction in withholding tax on government bonds to attract higher foreign capital inflows into India.
About Withholding Tax
- The Government of India collects withholding tax directly at the source when certain payments are made to non-residents.
- The tax applies to income such as interest, dividends, royalties and wages earned in India.
- Foreign investors earning interest income from Indian bonds are also liable to pay withholding tax.
- The system works in a manner similar to Tax Deducted at Source (TDS) and is also known as Retention Tax.
- Under Section 195 of the Income Tax Act, 1961, the payer must deduct the tax before transferring or crediting the amount to a non-resident’s account.
- The applicable rate depends on the nature of income and relevant taxation provisions.
- India follows the lower tax rate prescribed either under the Income Tax Act, 1961 or the applicable Double Taxation Avoidance Agreement (DTAA).
