Withholding tax (WHT), also known as tax withholding, is a system used by governments around the world to collect income tax at the source of income. It is a mechanism that requires a person or entity making payments to another party to deduct a certain percentage of the payment and remit it directly to the tax authorities on behalf of the recipient. The primary purpose of withholding tax is to ensure that individuals and businesses pay their income taxes in a timely and efficient manner.

WHT applies to various types of income, including salaries, interest, dividends, royalties, and payments to non-resident individuals or entities. The rate at which tax is withheld can vary depending on the type of income, the tax laws of the country, and any applicable tax treaties between countries.

This tax system serves several important purposes. First, it helps governments generate a steady stream of revenue throughout the year, rather than relying solely on individuals or businesses to pay their taxes at the end of the fiscal year. Second, it acts as a mechanism to monitor and enforce tax compliance, as tax authorities can track the income earned by individuals and businesses through the withholding process. Finally, it simplifies the tax collection process by shifting the responsibility for tax withholding to the payer, reducing the burden on the recipient to calculate and pay taxes independently.

In conclusion, withholding tax is a fundamental component of a country's tax system that aids in efficient tax collection, promotes compliance, and ensures a consistent flow of revenue for government operations. Understanding how withholding tax works is crucial for individuals and businesses to meet their tax obligations and avoid potential penalties for non-compliance.