Withholding Tax Rate

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smita mohite (Querist)

23 May 2011 As per recent amendement Surcharge 2%& cess3%(for TDS deduction) is applicable for payment to Foreign co. Bt if we are deducting tax @ 20% due to non availability of PAN still this amendement is applicable?

CA. Himansu Sekhar Kabi

CA. Himansu Sekhar Kabi (Expert)

24 May 2011 Dear Smita,

A very interesting question and deserves a thorough analysis. Please find your answer below. Will glad to adress any critical query like rate, grossing up w.r.t withholding tax read with DTAA with respective countries.

1. The Surcharge is imposed by sub-section (5)/(6) of section 2 of the Finance Act, 2010 read with part II of the first schedule to the Finance Act. The sub-sections read as -
“(5) In cases in which tax has to be deducted under sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax act, at the rates in force, the deduction shall be made at the rates specified in Part II of the First schedule and shall be increased by a surcharge, for purposes of the Union, calculated in cases wherever prescribed, in the manner provided therein.
(6) In cases in which tax has to be deducted under sections 194C, 194E, 194EE, 194F, 194G, 194H, 194I, 194J, 194LA, 196B, 196C, and 196D of the Income-tax Act, the deductions shall be made at the rates specified in those sections and shall be increased by a surcharge, for purposes of the Union, in the case of every company, other than a domestic company, calculated at the rate of two and one-half per cent of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees”.
2. There is no reference of section 206AA in the two sub-sections [sub-section (5) and (6)] of section 2 of the Finance Act, 2010. Also there is no reference of section 206AA in the First Schedule to the Finance Act. Hence the rate of 20 per cent mentioned in section 206AA cannot be loaded with surcharge.
3. The Education cess is imposed by sub-section (11)/(12) of section 2 of the Finance Act, 2010. The sub-sections read as –
“(11) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by the applicable surcharge, for purposes of the Union, calculated in the manner provided therein, shall be further increased by an additional surcharge, for purposes of the Union, to be called the “Education Cess on income-tax”, calculated at the rate of two per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance universalised quality basic education :
Provided that nothing contained in this sub-section shall apply to cases in which tax is to be deducted or collected under the sections of the Income-tax Act mentioned in sub-sections (5), (6), (7) and (8), if the income subjected to deduction of tax at source or collection of tax at source is paid to a domestic company and any other person who is resident in India.
(12) The amount of income-tax as specified in sub-sections (1) to (10) and as increased by the applicable surcharge, for purposes of the Union, calculated in the manner provided therein, shall also be increased by an additional surcharge, for purposes of the Union, to be called the “Secondary and Higher Education Cess on income-tax”, calculated at the rate of one per cent of such income-tax and surcharge so as to fulfil the commitment of the Government to provide and finance secondary and higher education :
Provided that nothing contained in this sub-section shall apply to cases in which tax is to be deducted or collected under the sections of the Income-tax Act mentioned in sub-sections (5), (6), (7) and (8), if the income subjected to deduction of tax at source or collection of tax at source is paid to a domestic company and any other person who is resident in India”.
4. There is no reference of section 206AA in the two sub-sections [sub-section (11) and (12)] of section 2 of the Finance Act, 2010. Hence the rate of 20 per cent mentioned in section 206AA cannot be increased by Education cess.

Conclusion: The rates of 20 per cent specified in section 206AA cannot be increased by surcharge and education cess.

smita mohite

smita mohite (Querist)

24 May 2011 Thank You.

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