If as a taxpayer in India whose rate of TDS is way above your actual tax liability you should seriously consider approaching the Indian Revenue Authorities to obtain a Lower Withholding Tax Certificate (LWTC), which helps in lowering the rate of TDS. A few circumstances where the lower withholding tax certificates can be obtained include a situation where the taxpayer is making losses or has carried forward losses, or as a taxpayer you’re availing certain exemptions (like charitable institutions). This is a great way to improve cash flow while paying the correct tax liability upfront.
While an LWTC isn’t very cumbersome to obtain, it does take a reasonable amount of documentation and steps to be followed. With this article, our attempt is to outline how to apply online for an LWTC.
First of all, you will need to collect all the necessary documents:
- Provisional financial statements with the computation of income for the last year,
- Audited financial statements along with the computation of income and income tax returns for the last three years
- A projected financial statement for the current year with computation of income tax return
- Details of taxes which have already been paid/ deducted
- A copy of the contract or purchase order for which this revenue is expected to be received, and
- Tax Deduction and Collection Account Number of the party who will withhold TDS.
The last three years’ information is sought for by the tax officer to understand the pattern of the income(s) and expense(s) incurred by the taxpayer in the past. Further this information is also used to compute the average rate of tax which is being paid by the taxpayer on the income. Since, the tax authorities are also concerned about any outstanding tax demands, please ensure there is no outstanding demand as per the income tax portal and TRACES portal. In case of an outstanding, you’ll need to ensure that the rectification application is filed or stay of demand has been obtained from the tax authorities.
Foremost, you need to step into the TRACES portal as a ‘Taxpayer’ and create a login. For creating the login on the TRACES portal, you’ll need to keep some details like date of birth/ date of incorporation, details of taxes paid previously, email and mobile number (for receiving the OTP and confirmation email) handy. In case of a situation where no taxes have been paid in past, you can pay a small amount (like INR 10) for the current year and use such information for creating the login. Generally, after making the payment, it takes two to three days for the portal to give cognizance of the payment.
Once all the documents are ready, prepare and file a request for an LWTC in Form 13 on the TRACES portal. The form may be uploaded along with the required documents on the TRACES portal. Form 13 can be submitted and verified using digital signatures, mobile-based OTP or e-verification (through Aadhaar OTP, net banking etc). The easiest and most convenient way to verify the form is using the OTP received on the mobile number registered in the profile section of the TRACES portal.
On completion of the form and documents, the tax officer may have queries in connection with your application. You are required to respond to such queries and furnish documents, if any, demanded by them immediately. In some cases, representation must be directly made to the tax authorities to support your case for an LWTC. This shall help the tax officer better understand the facts and legal position of the case, and timely disposal of the application.
Once all supporting documentation is checked by tax authorities and a LWTC is approved, you can download the LWTC from the website of TRACES. LWTC will specify the reduced rate of TDS for your income that will be applicable prospectively.
In sum, obtaining a lower withholding tax certificate in India is relatively simple, though follow-up documentation and responses can take some time. Overall LWTC can be quite instrumental in minimizing the quantum of tax that is deducted from your income at the source, increasing your cash flow.
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Vaansh Sharma
Vaansh Sharma is a Manager at the Tax and Regulatory division of Coinmen. He specialises in restructuring advisory, corporate tax, and M&A business and transaction advisory. Also, he has worked with clients from various backgrounds including Multinational Corporations, Charitable Institutions, and Ex-patriates.