Surcharge and Education Cess on Withholding Tax

taxEarlier articles have discussed about applicability of Withholding Tax on Interest payment in case of Buyers Credit and Suppliers Credit. Readers have come back asking query whether Surcharge and Education Cess is applicable or not on withholding tax amount. Below article answers these queries.

Is Surcharge and Education Cess Applicable on WHT ?

Yes. The basic gross rate of withholding tax on a foreign currency loan, availed by an Indian holding company from non-residents is 20% which, with applicable surcharge and education cess.

Incase of DTAA limits Surcharge and Education Cess

Withholding Tax rates may be limited by application of a tax treaty. The surcharge and education cess will not apply where the withholding tax is limited by a tax treaty.

Incase where DTAA is Silent on Surcharge and Education Cess

Incase where double taxation avoidance agreement does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source, there is an apparent conflict between the Income-Tax Act and DTAA between the two sovereign countries.  Thus one needs to refer Sec 90(2) of Income-Tax Act

“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent that are more beneficial to that assessee.”

In view of the above, in respect of a taxpayer to whom the double taxation avoidance agreement applies, the provisions of the Indian Income-tax Act shall apply to the extent they are more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Incase where DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source,  taxpayer can take advantage of that provision in the DTAA for deduction of tax.

Reference

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4 thoughts on “Surcharge and Education Cess on Withholding Tax”

  1. My Query wrt Education Cess is as follows

    My Client need to remit to Germany on account of Technical Services. Taking the benefit of DTAA the Remittance is taxable @ 10% if PAN is Provided by the assessee

    However the Beneficiary does not have PAN in India, Hence it would be taxable @ 20% as per Sec 206AA (on account of Non availability of PAN)

    My Query Starts whether I need to pay TDS @ 20% (Excluding Edu. Cess) or
    @ 20.60% (Including Edu. Cess)

    1. Incase there is DTAA between both countries, Pan Card and Tax Residence Certificate of Supplier / Bank is available, in that case rate as per DTAA is applicable. For example in this case it is 10%. Then as per DTAA maximum rate applicable is 10% and thus education cess and surcharge is not applicable.

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