What is Withholding Tax?
Withholding tax is tax collected at the point of payment. Instead of waiting for the recipient to file a return, the payer deducts a percentage of the payment and pays it to the tax authority. India's version for domestic payments is TDS. Many other countries apply withholding to payments made to foreign service providers, especially for royalties, licence fees and some technical or management fees.
The rate depends on the payer country's domestic law and on any tax treaty with India. A DTAA can reduce the rate, but usually only if you provide proof of residence such as a Tax Residency Certificate and the paperwork the client's country asks for.
Why it matters for exporters
Withholding changes the amount you actually receive. If you invoice EUR 10,000 and the client withholds 10 percent, only EUR 9,000 reaches your account. Your EDF, however, records the invoice amount and its net realisable value. When the bank tries to match the money in EDPMS, it will see a shortfall. Keep the client's withholding certificate, the invoice and the FIRA together, and ask your AD bank how it wants the withheld portion explained. Our fact sheet does not prescribe a specific method, so do not guess.
On the tax side, you can usually claim credit in India for tax withheld abroad, which is what Form 67 is for. The EDF itself does not change your income-tax position.
Example
Orbit Media Pvt Ltd licenses video content to a broadcaster abroad for USD 20,000. Under that country's law and the treaty, the broadcaster withholds USD 2,000 and pays USD 18,000, issuing a certificate. Orbit's bank credits ₹15,03,000. Orbit gives the bank the invoice, FIRA and withholding certificate, and its CA claims foreign tax credit at year end. See EDF for royalty and licence fees for more.
Common confusion
Withholding tax is not a bank charge, though both reduce what you receive. Bank charges are fees; withholding is tax you can generally credit. Compare bank charges (OUR/SHA/BEN). This is general information, not tax advice.