Tax deduction at source is a method of collecting taxes on behalf of the Government at the time of payment or credit. The Income-tax Act casts a legal responsibility on the deductor to deduct tax on the correct amount, at the correct rate and deposit it to the Government account. The TDS rates are specified partly in the Finance Act and partly in the provisions of the Income tax Act. Deductors are also required to compute surcharge and cess over and above some of the prescribed rates of TDS. If the deductor fails to deduct the tax or fails to deposit the tax after deduction, interest, penalty and prosecution provisions may get attracted. Further, under the provisions of sub-clause (ia) of clause (a) of section 40, if the deductor fails to deduct tax on a prescribed payment or fails to deposit the tax deducted in time, the entire expenditure is disallowed while computing his total income. To assist deductors in complying with their TDS obligations and reduce their compliance burden, it is proposed to rationalise the provisions of TDS as under:
a. Rationalisation of TDS rates:
A. Under the existing provisions of section 194-I of the Income-tax Act, TDS on rental payments is prescribed at the rate of–
(a) 10% for the use of any machinery or plant or equipment,
(b) 15% for the use of any land or building or furniture or fittings, if the payee is an individual or HUF and
(c) 20% if the payee is other than an individual or HUF.
The current rates need a downward revision as they are leading to blocking of working capital funds in many cases. It is therefore proposed to rationalise and reduce the TDS rates on rental payments as under:
(a) 2% for the use of any machinery or plant or equipment,
(b) 10% for the use of any land or building or furniture or fittings for all persons.
|Nature of Payment (194-I)||Existing rate||Proposed rate*
( w.e.f. 1-10-2009)
|a. rent of plant, machinery or equipment
|b. rent of land, building or furniture to an individual and Hindu undivided family||15%||10%|
|c. rent of land, building or furniture to a per son other than an individual or Hindu undivided family||20%||10%|
|* The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 1.04.2010.|
B. Under the existing provisions of section 194C of the Income-tax Act, TDS at the rate of 2% is deducted on payment for a contract. However, in the case of a sub-contract, TDS is deducted at the rate of 1%. Further, in the case of payment for an advertising contract, TDS is required to be deducted at the rate of 1%.
In order to reduce the scope for disputes regarding classification of contract as sub contract, it is proposed to specify the same rate of TDS for payments to both contractors as well as sub-contractors. To rationalise the TDS rates and to remove multiple classifications it is also proposed to provide same rate of TDS in the case of payment for advertising contracts. To avoid hardship to small contractors/sub-contractors most of whom are organized as individuals/HUFs, it is proposed to prescribe following rates of TDS:
(a) 1% where payment for a contract are to individuals/HUF
(b) 2% where payment for a contract are to any other entity.
|Nature of Payment (194C)||Existing rate||Proposed rate**(w.e.f. 1-10-2009)
|Payment to —|
|a. Individual/HUF contractor 2% 1%
b. Other than individual/HUF contractor
|c. Individual/HUF sub-contractor||1%||1%|
|d. Other than individual/HUF sub-contractor||1%||2%|
|e. Individual/HUF contractor/sub-contractor for advertising||1%||1%|
|f. Other than individual/HUF contractor/ sub-contractor for advertising||1%||2%|
|g. Sub-contractor in transport business||1%||nil*|
|h. Contractor in transport business||2%||nil*|
|* The nil rate will be applicable if the transporter quotes his PAN. If PAN is not quoted the rate will be 1% for an individual/ HUF transporter and 2% for other transporters upto 31.3.2010.|
** The rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee w.e.f. 1.04.2010.
C. Further some of the rates of TDS specified for resident taxpayers have been reduced and converged to 10 per cent.
D. In order to ease the computation of TDS, it is proposed to remove surcharge and cess on tax deducted on non-salary payments made to resident taxpayers.
b. Provisions for payments and tax deducted at source to transporters:
Under Section 194C, tax is required to be deducted on payments to transport contractors engaged in the business of plying, hiring or leasing goods carriages. However if they furnish a statement that they do not own more than two goods carriages, tax is not to be deducted at source. Transport operators report problem in obtaining TDS certificates as these are not issued immediately by clients and they are not able to approach the client again as they may have to move across the country for their business. It is, therefore, proposed to exempt payments to transport operators (as defined in section 44AE) from the purview of TDS. However, this would only apply in cases where the operator furnishes his Permanent Account Number (PAN) to the deductor. Deductors who make payments to transporters without deducting TDS (as they have quoted PAN) will be required to intimate these PAN details to the Income Tax Department in the prescribed format.
Further under the existing provisions of sections 40A(3) the Income-tax Act, if an assessee incurs any expenditure in respect of which payment in excess of Rs 20,000 is made otherwise than by an account payee cheque or account payee bank draft, such expenditure is not allowed as a deduction. As a large number of small truck owners/drivers have little working capital and do not have bank accounts outside their home cities, they insist on payment in cash for undertaking long haul journeys, as they need cash for incurring en-route expenses on diesel, food and repairs etc and such expenses generally exceed Rs 20,000/-. This causes operational problems to those who have to pay for their services.
To address this problem, it is proposed to raise the limit of cash payment to such transport operators to Rs 35,000/- from the existing limit of Rs 20,000/-.
These amendments will take effect from the 1st day of October, 2009 and will accordingly apply to transaction on or after such date.
c. Clarification regarding “work” under section 194C.
There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is proposed to provide that “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). It is also proposed to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, within the definition of ‘work’. It is further proposed to provide that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value.
It is further proposed to make the amendments effective from the 1st day of October, 2009. Accordingly, the proposed amendments will apply to credits or payment effected on or after 1st October, 2009.
d. Improving compliance with provisions of quoting PAN through the TDS regime
Statutory provisions mandating quoting of Permanent Account Number (PAN) of deductees in Tax Deduction at Source (TDS) statements exist since 2001 duly backed by penal provisions. The process of allotment of PAN has been streamlined so that over 75 lakh PANs are being allotted every year. Publicity campaigns for quoting of PAN are being run since the last three years. The average time of allotment of PAN has come down to 10 calendar days. Therefore, non-availability of PAN has ceased to be an impediment. In a number of cases, the non-quoting of PANs by deductees is creating problems in the processing of returns of income and in granting credit for tax at deducted at source, leading to delays in issue of refunds.
In order to strengthen the PAN mechanism, it is proposed to make amendments in the Income Tax Act to provide that any person whose receipts are subject to deduction of tax at source i.e. the deductee, shall mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at higher of the following rates
(i) the rate prescribed in the Act;
(ii) at the rate in force i.e., the rate mentioned in the Finance Act; or
(iii) at the rate of 20 per cent.
TDS would be deductible at the above-mentioned rates will also apply in cases where the taxpayer files a declaration in form 15G or 15H (under section 197A) but does not provide his PAN. Further, no certificate under section 197 will be granted by the Assessing Officer unless the application contains the PAN of the applicant.
These provisions will also apply to non-residents where TDS is deductible on payments or credits made to them. To ensure that the deductor knows about the correct PAN of the deductee it is also proposed to provide for mandatory quoting of PAN of the deductee by both the deductor and the deductee in all correspondence, bills and vouchers exchanged between them.
This amendment will take effect from 1st April, 2010. [Clauses 16, 60, 61]
e. Processing of statements of tax deducted at source
Currently almost all statements of tax deducted at source are filed in an electronic mode. The processing of these statements should, therefore, be done only in a computerized environment. It is therefore proposed to provide for processing of statements of tax deducted at source on computer so that liabilities on account of interest and other defaults in TDS payment are promptly calculated and intimated to the deductor. In order to process TDS statements on computer, it is proposed to provide for electronic processing on the same lines as processing of Income-tax returns.
It is proposed that the following adjustments can be made during the computerized processing of statements of tax deducted at source:
(i) any arithmetical error in the statement; or
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in respect of rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act.
It is proposed to provide that after making adjustments, tax and interest [e.g. u/s 201(1A)] would be calculated and sum payable by the deductor or refund due to the deductor will be determined. Intimation will be sent to the deductor informing him of his tax liability or granting him the refund due within one year from the end of the financial year in which the statement is filed. It is also proposed that the processing of these statements can be undertaken in a centralized processing centre.
This amendment will take effect from 1st April, 2010 [Clauses 64,65]
f. Providing time limits for passing of orders u/s 201(1) holding a person to be an assessee in default
Currently, the Income Tax Act does not provide for any limitation of time for passing an order u/s 201(1) holding a person to be an assessee in default. In the absence of such a time limit, disputes arise when these proceedings are taken up or completed after substantial time has elapsed.
In order to bring certainty on this issue, it is proposed to provide for express time limits in the Act within which specified order u/s 201(1) will be passed.
It is proposed that an order u/s 201(1) for failure to deduct the whole or any part of the tax as required under this Act, if the deductee is a resident taxpayer shall be passed within two years from the end of the financial year in which the statement of tax deduction at source is filed by the deductor. Where no such statement is filed, such order can be passed up till four years from the end of the financial year in which the payment is made or credit is given. To provide sufficient time for pending cases, it is proposed to provide that such proceedings for a financial year beginning from 1st April, 2007 and earlier years can be completed by the 31st March, 2011.
However, no time-limits have been prescribed for order under sub-section (1) of section 201 where—
(a) the deductor has deducted but not deposited the tax deducted at source, as this would be a case of defalcation of government dues,
(b) the employer has failed to pay the tax wholly or partly, under sub-section (1A) of section 192, as the employee would not have paid tax on such perquisites,
(c) the deductee is a non-resident as it may not be administratively possible to recover the tax from the non-resident.
It is proposed to make these amendments effective from 1st April, 2010. Accordingly it will apply to such orders passed on or after the 1st April, 2010. [Clause 65]
g. Filing of TDS and TCS statements
Sub-section (3) of section 200 of Income-tax Act provides that any person deducting tax in accordance with the provisions of Chapter XVIIB has to furnish, within the prescribed time, quarterly statements for the period ending on the 30th June, 30th September, 31st December and 31st March in each financial year. Similarly, filing of quarterly returns for tax collection at source (TCS) have been provided in sub-section (3) of section 206C of the Act. Further section 206A provides furnishing of quarterly return in respect of payment of interest to residents without deduction of tax.
In order to provide administrative flexibility in deciding the periodicity of such TDS related statements, it is proposed to modify the existing provisions so as to allow the Government to prescribe periodicity of such TDS statements besides prescribing their form and manner.
These provisions will be applicable from 1st October, 2009. [Clauses 52, 63, 66, 67, 68, 69, 74]