Tax Deducted at Source-Scope and Way Forward

Aman Preet
Deputy Commissioner,
Income Tax (TDS)
New Delhi
amanpreet2244@gmail.com

Aman Preet has done post graduation in sociology from Punjab University Chandigarh and joined Income Tax Department in 2010 as an Indian Revenue Service (IRS) Officer. She has recently completed her LLB also. She has worked in department in various charges varying from exemptions, business, corporate, systems, I & CI and investigation. She has also served Election Commission of India during Gujrat Assembly Elections. She is presently working as Deputy Commissioner in TDS, circle 77(1).

Executive Summary

The government uses TDS as a tool to collect tax in order to minimise tax evasion at a later date. The objective of TDS could be said, in general, to be maximization of revenue collection while minimizing the cost of collection. Some of the countries do not depend on TDS, while some others (such as Canada, Indonesia, Malaysia, Philippines and the USA) heavily depend on TDS. In the latter group of countries, the share of TDS in total collection of income tax of a country not less than 60 per cent. In fact, it has been more than 80 per cent in Canada and USA. In India,there have been constant efforts to increase the scope of TDS over the period of Time. Efforts must be made to increase the awareness amongst deductors so as to help increase tax collection and widen the tax base.

Tax Deducted at Source (TDS) was introduced to collect tax at the source from where an income is generated to a person. The government uses TDS as a tool to collect tax in order to minimise tax evasion by taxing the income (partially or wholly) at the time it is generated rather than at a later date. TDS is not applicable to all incomes and persons for all transactions. The Income Tax Act for different payments and different categories of recipients has prescribed different rates of TDS. TDS works on the concept that every person making specified type of payments to any person shall deduct tax at the rates prescribed in the Income Tax Act at source and deposit the same into the government’s account. TDS can be applicable for income that are regular as well as irregular in nature

TDS rule directs the payer to deduct a certain amount of tax before making full payment to the receiver. TDS is applicable for salary, commission, professional fees, interest, rent, etc. Since TDS is collected at the source of one’s income, it effectively minimises evasion of tax by getting the income taxed, whether completely or moderately at that point of time.

The objective of TDS could be said, in general, to be maximization of revenue collection while minimizing the cost of collection. Tax must be deducted at the time of payment in cash or cheque or credit to the payee’s account whichever is earlier. Any payment covered under Income tax provisions for TDS shall be made after deducting Tax at source in prescribed percentage. Assessee deducting Tax at source is also required to file quarterly return. Quarterly/ Annual Returns state the TDS amount deducted & paid to government during the Quarter/ year to which it relates.

Main activities which a deductor of TDS needs to perform under TDS Provisions:

1. Responsibility for deduction or collection of tax at source is fixed on specified persons.

2. Every specified person responsible for deduction of tax at source is required to obtain a tax deduction Account Number.

3. Time for payment of tax deducted or collected at source to the Government account is prescribed.

4. Certificates of TDS have to be issued to the tax payers on prescribed forms and within specified time.

5. Every person responsible for deduction of tax at source shall file quarterly statements

6. Tax has to be deducted/collected at the specified rates.

7. Conditions for less or no deduction of tax are specified.

8. Statements of TDS have to be submitted on prescribed forms and within specified time.

9. Penal and other consequences for non- compliance are provided.

Type of payments on which TDS is applicable

To summarise the type of payments on which TDS is applicable, the following can be envisaged:

• Salaries
• Interest payments by banks
• Commission payments
• Rent payments
• Consultation fees
• Professional fees
• Rent Other Incomes as per TDS provisions (Sec 192-195)

The above list is just an indicative list and there are various other nature of payments which are liable for tax deduction. The scope of tax deduction at source and all related compliances have been prescribed under Chapter XVIIA, XVIIB & XVIIBB of the Income Tax Act,1961. The provisions are covered in the sections 190 to 206CA of the Income Tax Act 1961.

In the international perspective, TDS in India can be said to be moderate in terms of both its coverage and share in total income tax collection. Some of the countries do not depend on TDS, while some others (such as Canada, Indonesia, Malaysia, Philippines and the USA) heavily depend on TDS. In the latter group of countries, the share of TDS in total collection of income tax of a country not less than 60 per cent. In fact, it has been more than 80 per cent in Canada and USA.

Under the scheme of tax deduction at source (TDS), persons responsible for making payment/ credit of income, are responsible to deduct tax at source and deposit the same to the government treasury within stipulated time followed with filing the required returns. The recipient of net income is liable to tax on the gross amount as per applicable rate and the amount so deducted shall be adjusted/ reduced from his total tax liability. As TDS rates are changed in Finance Acts amended from time to time and the relevant rate for the applicable previous years has to be applied by the deductor as normal TDS rates.

When Recipient does not furnish his PAN to the deductor, he is supposed to deduct the applicable rate of TDS or 20% whichever is higher (section 206AA) w.e.f 1/4/2010.

The rule is however subject to following exceptions.

• Certain payments of interest to anon resident u/s 194LC
• Where tax is deductible at a rate less than 20% as per provisions of DTAA
• Under section 192A, tax is deductible at marginal rate of Tax i.e 35.88% from FY2018-19
• Recipient is located in a notified jurisdictional area sec 94(A)5, the payer will deduct tax at the rates in force or 30% whichever is higher.

The main responsibilities and procedure for TDS .

1. Payer of any payment subject to TDS (except 194-IA & 194-IB) has to apply for Tax deduction/collection account number (TDCAN) in form no 49B. Payers those who have obtained TAN and TCAN separately under the erstwhile provisions of IT Act prior to 1.10.2004, they need not apply for separate numbers.

2. Tax has to be deducted from the income/ payment mentioned in various sections i.e section 192 to 196D.

3. Amount deducted has to be deposited challan 281 within the requisite time the credit of central govt.

4. Tax has to be deducted at the basic rates prescribed under various sections. only case of tax deduction from Salary(resident &non resident), payment/credit of any sum to a non resident, foreign company applicable surcharge, education cess, secondary higher education cess has be added to basic rate.

5. As per section 206AA if PAN is not provided, the rate of TDS shall be normal rate or 20% whichever is higher.

6. Payee has to be issued with certificate of Tax deduction at source on or before specified date.

7. Payer has to prepare prescribed statements for such period and file the same with prescribed Income tax authority, duly verified by the filer in the prescribed manner.

The problem of tax evasion is a fundamental reason for expanding the scope of TDS.

Therefore each the Act is amended to increase the scope of the TDS. Accordingly In the Finance (No.2) Act, 2019, The scope of TDS has been widened by incorporating following amendments:

1. TDS Rate on taxable life insurance payment raised to 5% on net income from 1% on gross payment as per Section 194DA

2. Consideration for transfer of Immovable property to include club membership fee, car parking fee, etc., for the purpose of TDS under Section 194-IA

3. Individual/HUF not liable to tax audit also to deduct TDS on payment to contractors, commission/brokerage agent and professionals in certain cases wherein payment made is more than Rs. 50 lacs in a year as per Sections 194M, 203A, 197

4. TDS on cash withdrawal from bank exceeding Rs. 1 crore to discourage cash transactions as per Section 194N and section 198

During preceding years TDS was approx. 40% of Total Direct Tax Revenue in FY 2018. The constant efforts are being made by the Government to increase the Share of TDS. Deduction of tax also helps increasing tax base keep tax collection a less intrusive affair.

The Way forward:

There have been constant efforts to increase the cope of TDS over the period of Time. However with the advent digital economy and E-commerce certain areas still needs greater scrutiny which can be listed below as a general case wherein the efforts must be made to increase the awareness amongst deductors so as to help increase tax collection and widen the tax base.

1. Non Deduction of TDS by Investors on Management Fees Charged by Portfolio Management Companies

Portfolio Management Companies charges Management Fees for Funds Management. The Management fees is not being reported to Investor on peridoc basis but at the end of the year. Most of the time Management Fees is being debited in capital account of Investor as at close of the year. If Investor is liable to deduct TDS on such management Fees, its escapes such deduction becuase Investor either not aware to deduct Tax on the same or avoids due to time delays. Awareness must be made in order to plug any leakage of TDS on this count. Moreover the Portfolio Management Companies can be required to furnish statement of Management Fees charged from the Investor and Non compliance can be monitored and enforced.

2. Transfer of Under Construction Flats by Real Estate Firms thru Endorsements and TDS on property by Buyer

Under Construction flats are being transferred by Real Estate Firms by endorsement in their record. No registry takes place although money exchanges hands. Builder does not enforce TDS deduction liability on buyer unless buyer voluntarily deducts it. If buyer and Seller collude to not have any deduction of TDS of under construction immovable property
purchase/sale, there is no mechanism to detect such non-deduction of cases. Real Estate comapanies must be mandated to report all transfers and must be mandated to ensure that TDS has been deducted by buyer at the time of transfers in their records.

3. E- Commerce Operator – Tax at Source for listing and other fees charged by E- Commerce operator from market place sellers

E-Commerce operators such as Amazon, Flipkart, Snapdeal, Paytm charges Listing Fees/Commission/Various other charges from online sellers for listing of their products at their E-commerce portal. As per current practice, E-Commerce companies debit these charges to sellers account out of sale proceeds realized from customers. Sellers is required to deposit tax from their own pocket and upload TDS certificate on E-commerce portal after end of the quarter and then E-commerce companies reimburses such TDS to sellers. If seller do not deposit tax, the E-commerce companies does not insist on the same as it is the responsibility of sellers to deduct TDS on charges levied by E-commerce Companies. Absence of deduction leads to revenue leakage for the department.

Considering the size of E-commerce companies, it is potentially high revenue escaping area. Due to various issues, sellers do not deposit TDS for hardship to claim from E-commerce companies and department does not get revenue. Some mechanism must be put in place and online companies must be required to report the listing fees etc charged from sellers to department to verify whether parties which are liable to deduct TDS on such fees are complying the same or not and accordingly enforcements of the same should be done. The data required from E-commerce companies will contain PAN. With the Linking of TAN with PAN, potential non deductors can be traced easily.

The Share of TDS in Total Gross Direct Tax Revenue collection is less than 50%. Efforts must be made to increase the share to catch up with the Developed countries such as USA & Canada. The department in recently has made lot of efforts to decriminalize the TDS provisions by relaxing the prosecution norms. Like when the non-payment of TDS is upto Rs 25 lakh or less with a delay of not more than 60 days from the due date, there will be no prosecution under normal circumstances. Previously, section 276B of the IT Act provided for prosecution for a minimum term of three months for the delay in TDS deposits of amounts more than 1 lac after the due date. Also as a one-time measure, CBDT has relaxed the 12-month period for filing of a compounding application as are course in lieu of prosecution.

Concluding Remarks

The intent of the department is clear to facilitate the genuine taxpayers and the income tax department is making constant efforts to come up with measures to ensure that honest taxpayers are not harassed and those who commit minor or procedural violations are not subjected to disproportionate or excessive action. This will install lot of confidence in mind of the deductors especially small-medium businesses and will go a long way ensuring better tax collection on account of TDS.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes