Withholding tax at source

Description

Withholding tax at source is the practice of deducting tax from income payments—such as wages, dividends, or interest—before they reach the recipient. This strategy ensures timely tax collection, reduces evasion, and simplifies compliance for both taxpayers and authorities. By remitting taxes directly to the government, it addresses issues of underreporting and late payments, providing a practical remedy for revenue leakage and enhancing the efficiency and reliability of tax administration systems.

Context

The scant auditing resources available in the tax administrations of most developing countries make it impractical to audit more than a small percentage of those from who taxes are due. Systems of withholding tax from current income are therefore one of the most efficient techniques for preventing delinquency and evasion. Withholding is most commonly applied to wage income. It may also be applied to interest and dividends.

Counter-claim

An effective withholding scheme requires a small number of readily identifiable payers of income. It is hard to apply to rental income, professional income and small business income where there are as many payers as receivers.