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 Indiancorporateto 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 perIncome Tax Act, 1961which varies from country to country as per DTAA (Double Taxation Avoidance Agreement) between India and the lenders country. There83 countries where India has DTAA. One of the condition to use DTAA rate is thatlending institution should have an Indian Pan Card. When foreign bank quote forbuyers creditthey 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 DoubleTaxationAvoidance 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 Tax1. First check the country from which buyers credit is to be made available to finalize rate of TDS (Refer link: countrywise double taxation summary chart ).2. Deposit the tax throughchallan no. 281(nature of payment 195).3. GetForm15CBissued from Chartered Accountant (CA) for the buyers credit interest payment.4. Submit onlineForm 15CAbased using form 15CB provided by CA.5. 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.6. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).7. AD Bank forwards a copy of document to Assessing officer / Income Tax Department.Note:1. If DTAA & PAN of buyers credit providing bank is available, then as per DTAA .2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).3. 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.

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: 50Net Interest Amount = $ 1000 ($100000*2%*(180/360)Gross Interest Amount = $1111 ($1000* (100/90)Withholding tax = $ 111 = Rs. 5550Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

** As per Income Tax Act 1961:Sec195A.[In a case other than that referred to in sub-section (1A) ofsection 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.]