What is the penalty if I did not deduct tax on a payment abroad?
The exposure is not a single figure. The tax that should have been deducted becomes recoverable from you as payer, interest runs on it for the period it was not with the department, and where the payment was a business expense the deduction for that expense can be disallowed. Separate consequences attach to failing to report what was deducted, as distinct from failing to deduct at all. Because the amounts turn on the sum involved and the length of the delay rather than on a flat charge, the first useful step is quantifying the shortfall.
I deducted the tax but never deposited it — how bad is that?
Worse than not deducting, and treated differently. Money taken out of someone else's payment and kept is not a filing lapse. It is a sum held on account of the department that has not been handed over, and the consequences reflect that. The advice is always the same: deposit it, with interest for the period it was held, before anything else is done on the file. Putting that right first also changes the character of the later conversation, because the remaining question becomes reporting and timing rather than money still missing.
Can I still claim the expense if I pay the withholding now?
Paying late is generally better than not paying, and the position on the expense is one of the main reasons to fix an old default rather than leave it alone. Disallowance is the part that hurts a profitable payer most, because it converts a withholding failure into extra tax on your own profits. Whether and when the expense comes back into account depends on when the deduction is actually paid over, relative to the year in which the expense was claimed, so the sequence matters and is worth establishing before you remit.
The non-resident already paid tax at home — do I still owe anything?
On the face of it, yes. Your obligation as payer is not discharged by the recipient's tax position elsewhere, and a foreign tax payment is not a substitute for a deduction that should have been made in India. Whether the sum was chargeable in India at all is a different and better question, and it is the one worth examining, because if it was not chargeable there was nothing to deduct. That determination is what should have been documented at the time, and it can still be documented now from the same facts.
I bought a flat from an NRI years ago and deducted nothing — what now?
You were the payer, so the shortfall is yours, and the seller is usually no longer reachable in any practical sense. That is uncomfortable, but it is better handled than discovered. The work is to establish what the seller's chargeable sum was, quantify the deduction that should have been made, pay it over with interest and report it properly under your own details. Where the sale documents contained an indemnity or a retention, there may also be a civil route to recovery from the seller, which is separate from the tax position.
Will fixing one old default get my other payments looked at?
It can draw attention to the same payment stream in other years, which is why we look at the whole series before touching one year of it. Correcting a single payment while identical payments sit unexamined on either side of it is the position that goes badly. The better sequence is to establish the determination for the whole stream first, quantify every year affected, then put them right together, so that what goes in is a complete and consistent position rather than an invitation to ask about the rest.
What is Part XIII withholding?
Canada's flat withholding on certain payments to non-residents — dividends, interest to related parties, rents, royalties, pension and annuity payments, management fees. The payer withholds and remits, and is liable if they do not, which is why they insist on documentation. A treaty can reduce the rate, but only where the recipient has given the payer the declaration establishing entitlement before payment. Where too much was withheld, a refund claim is the route, with its own time limit. See Part XIII withholding review.
When is Form 1116 not required?
Three situations. You elect the exception for a small amount of creditable foreign tax that arises from passive income and is reported to you on a payer statement such as a 1099 or K-1. You choose to deduct the foreign tax instead of crediting it. Or all the foreign income was excluded under the foreign earned income exclusion, in which case there is no credit to claim on it in the first place. The first option costs you the carryover. See Form 1116.
