what is withholding tax
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Withholding tax is the amount withheld by the party making
a payment to another (payee) and paid to the taxation
authorities. The amount the payer deducts may vary,
depending on the nature of the product or service being
paid for. The payee is assessed on the gross amount, and
the tax to be withheld (the withholding tax) is computed in
that assessment. The purpose of withholding tax is to
facilitate or accelerate collection, by collecting tax from
payers rather than a much greater number of payees, and by
collecting tax from payers within the jurisdiction rather
than payees who may be outside the jurisdiction. It may
also be used to counteract tax evasion and tax avoidance.
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Answer / s.sridhar
Deduction Under Section 194 of Income Tax Act.
In simple terms, TDS is the tax getting deducted from the
person receiving the amount (Employee/Deductee) by the
person paying such amount (Employer/Deductor).
Take example as for Salaried employees Form 16 and for
Consultants Form 16A.
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Case Study: Deepak Hand tools Private Limited DHPL is a small sized firm manufacturing hand tools. It manufacturing plan is situated in Haryana. The company’s sales in the year ending on 31st March 2007 were Rs.1000 million (Rs.100 crore) on an asset base of Rs.650 million. The net profit of the company was Rs.76 million. The management of the company wants to improve profitability further. The required rate of return of the company is 14 percent. The company is currently considering an investment proposal. One is to expand its manufacturing capacity. The estimated cost of the new equipment is Rs.250 million. It is expected to have an economic life of 10 years. The accountant forecasts that net cash inflows would be Rs.45 million per annum for the first three years, Rs.68 million per annum from year four to year eight and for the remaining two years Rs.30million per annum. The plant can be sold for Rs.55 million at the end of its economic life. The company would need to raise debt to the extent of Rs.200 million. The company has the following options of borrowing Rs.200 million: a. The company can borrow funds from a nationalized bank at the interest rate of 14 percent for 10 years. It will be required to pay equal annual installment of interest and repayment of principal. b. A financial institution has offered to lend money to DHPL at 13.5 per annum but it needs to pay equated quarterly installment of interest and repayment of principal. Questions: 1. Should the company expand its capacity? Show the computation of NPV 2. What is the annual installment of bank loan? 3. Calculate the quarterly installments of the Financial Institution loan 4. Should the company borrow from the bank or from the financial institution?
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