What is WHT (Withholding Tax) ?
Under Sec 195 of Income Tax Act 1961, Tax is required to be deducted on the interest amount paid by the Indian corporate to overseas lenders (bank / suppliers) on the loans taken.
Why is it a deterrent ?
Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower
Impact on Importers ?
- Withholding Tax is paid as per Income Tax Act, 1961 which varies from country to country as per DTAA (Double Taxation Avoidance Agreement) between India and the lender’s country. There 83 countries where India has DTAA. One of the condition to use DTAA rate is that lending institution should have an Indian Pan Card.
- When foreign bank quote for buyers credit they quote as net of withholding tax. Thus one needs to do grossing up ** interest at the time of calculating WHT (example given below).
- Nil Withholding tax on Interest payment on funds arranged from Banks based out Mauritius. (Refer India Mauritius Double Taxation Avoidance Treaty: Page 9, Article 11 3(C))
- No Withholding tax on loans raised from overseas branch of Indian bank
Process flow of payment of Withholding Tax
- First check the country from which buyer’s credit is to be made available to finalize rate of TDS (Refer link: countrywise double taxation summary chart ).
- Deposit the tax through challan no. 281 (nature of payment 195).
- Get Form 15CB issued from Chartered Accountant (CA) for the buyers credit interest payment.
- Submit online Form 15CA based using form 15CB provided by CA.
- Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for buyers credit interest.
- File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
- AD Bank forwards a copy of document to Assessing officer / Income Tax Department.
- If DTAA & PAN of buyers credit providing bank is available, then as per DTAA .
- If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
- Withholding Tax rates may be limited by Application of a tax treaty. The surcharge and education cess will not apply where the withholding tax rate is limited by a tax treaty.
Important Related Links
- Revised Form 15CA Format
- Revised Form 15CB Format, (PDF), Excel Format of Revised Form 15CB
- NOTIFICATION 67/2013 [SO 2659(E)] : Income-tax (Fourteenth Amendment) Rules, 2013 – Substitution of Rule 37BB and Form Nos. 15CA and 15CB Dated : 02-09-2013
- CBDT-Substitution of Rule 37BB and Form 15CA-15CB: Dated: 05-08-2013
- Income Tax Circular on Form 15CA and CB
- Procedure for furnishing information in Form 15CA and Form 15CB
- Form 15CA (Online Filling)
- Form 15CB (Format for Certificate)
- Online payment of TDS of Withholding Tax under Challan 281 (nature of payment 195)
- Form No. 27Q : Format used to file return of withholding tax on quarterly basis
- India Mauritius Double Taxation Avoidance Agreement (DTAA)
- Country-wise Double Taxation Summary Chart
- Countrywise DDTA Agreements Copy
- Form A2
- Section 195
- Section 115A
- Section 194LC
For example: Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bonafide banking or financing business.
To explain you mathematically:
Buyers Credit Foreign Bank : If WHT is 10% than,
BC Amount: $100000, Libor: 1%, Margin: 1% (net of WHT) , Tenure: 180 days, USD / INR: 50
Net Interest Amount = $ 1000 ($100000*2%*(180/360)
Gross Interest Amount = $1111 ($1000* (100/90)
Withholding tax = $ 111 = Rs. 5550
Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)
* Note: Above content is collected from various sources. Request to consult a tax expert before using the same.
** As per Income Tax Act 1961: Sec 195A. [In a case other than that referred to in sub-section (1A) of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.]