What does a withholding tax refer to?

What does a withholding tax refer to?

• A. Tax paid after sales transactions
• B. Tax withheld at source from certain payments
• C. Tax charged on business profits
• D. Tax imposed on capital gains

Answer: (B)

A withholding tax refers to a tax that is deducted at the source before certain payments are made to the recipient. This mechanism ensures that taxes on income—such as salaries, dividends, or interest—are collected by the government right at the point of payment, rather than relying on the recipient to report and pay these taxes at a later date. It serves to simplify the tax collection process and increase compliance, as the obligation lies with the payer to withhold and remit the tax to the government. In contrast to other options, tax paid after transactions typically refers to sales tax, which is not withheld at source but rather collected when a sale is completed. Taxes on business profits and capital gains refer to different types of taxation that apply to the overall profitability of a business or the profit made from the sale of an asset, respectively, rather than being withheld from specific payments. Thus, choosing the option that states it is a tax withheld at the source accurately captures the essence of what a withholding tax is designed to do.

A withholding tax refers to a tax that is deducted at the source before certain payments are made to the recipient. This mechanism ensures that taxes on income—such as salaries, dividends, or interest—are collected by the government right at the point of payment, rather than relying on the recipient to report and pay these taxes at a later date. It serves to simplify the tax collection process and increase compliance, as the obligation lies with the payer to withhold and remit the tax to the government.

In contrast to other options, tax paid after transactions typically refers to sales tax, which is not withheld at source but rather collected when a sale is completed. Taxes on business profits and capital gains refer to different types of taxation that apply to the overall profitability of a business or the profit made from the sale of an asset, respectively, rather than being withheld from specific payments. Thus, choosing the option that states it is a tax withheld at the source accurately captures the essence of what a withholding tax is designed to do.