Withholding tax at source

Description

Withholding tax at source is a fiscal strategy whereby tax authorities require payers, such as employers or financial institutions, to deduct tax from payments (e.g., salaries, dividends) before transferring funds to recipients. This process ensures timely tax collection, reduces evasion, and simplifies compliance by shifting the administrative burden to payers. It remedies revenue leakage and enforcement challenges, providing governments with a steady cash flow and improving overall tax system efficiency.

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.