Under Income tax law income tax can be collected in two ways i.e. directly from the assessee where assessee makes tax payment directly (i.e. self assessment tax and advance tax or tax or any other sum on assessment) or indirectly from the assessee where tax is borne by the assessee but payment is made by somebody else (TDS and TCS where tax deductor or tax collector makes payment of tax after deducting from the income of or the payment belonging to, the assessee or collecting from the assessee). Collection and recovery provisions are contained in chapter XVII of the Income-tax Act, 1961 as follows:
1. From section 190 to 191 – part A – General
2. From section 192 to 206C – part B and BB contains TDS and TCS provisions (from section 192 to 206C)
3. From section 207 to 219 – part C contains advance tax provision
4. From section 220 to 232 – direct collection and recovery provisions are contained in part D
5. from section 233 to 234 – part E have been omitted,
6. From section 233A to 234C – part F – interest on tax liability
7. Section 234D – part F contains provision for interest on tax refund
8. From section 234E to 234H – part G which covers the topic of levy of fee in certain cases
Direct method of tax collection and recovery
1. Advance tax – it is the concept which is known as pay-as-you-earn because you must be aware that self assessment tax is paid on or before filing ITR but this departure from rule earn in previous year and pay in next year i.e. assessment year and advance tax provisions are contained from section 207 to 219
2. Self-assessment (according to you) tax – Under this concept you earn income in previous year and pay tax in next year i.e. assessment year and you must pay self-assessment tax on or before filing income tax return.
Indirect Method of tax collection and recovery
Indirect tax collection method involves third party between you and government i.e. tax deductor and tax collector.
1. Tax Deducted at Source (TDS) – Under TDS mechanism payer (e.g. employer, Bank paying interest, company paying dividend, buyer of immovable property, buyer of goods etc.) deduct certain sum from the amount payable to you. Now you might think why TDS provisions, see TDS is mechanism where government gets certain percentage of amount required to be paid to some other person or payee, so government get fractional tax amount (which may or may not become government’s proceed because TDS is provisional tax payment because by filing ITR you will inform about government about your income and tax and after deducting TDS there may be three cases 1. TDS = total tax liability on total income therefore no tax outflow from payee (i.e. assessee) 2. TDS< total tax liability on total income, therefore assessee is required to pay balance tax amount (tax liability –TDS) 3. TDS> total tax liability on total income, therefore assessee will get refund).
Under TDS person deducting TDS is known as tax deductor and person whose TDS is being deducted is known as payee
Since tax deductor files TDS return and in TDS return he has to provide details like PAN, amount paid or credited, TDS percentage applicable, TDS amount etc.) and after filing TDS return, tax deductor issues deduction proof e.g. form 16, form 16A etc. and TDS will get reflected in 26AS of the payee or assessee. Now assessee can take credit of TDS amount. Sometimes tax deductor does not issue tax deduction form still you can claim TDS if it is being reflected in your 26AS.
2. Tax Collected at Source (TCS) – Under TCS mechanism, person collecting tax (e.g. seller of buillion and jeweler, seller of goods, seller of scrap etc.) from the buyer (collectee) and TCS is something where person collecting tax, collects tax amount from the buyer in addition to consideration and TCS collector will pay TCS to government and TCS collector is required to file TCS return and buyer will get tax collection proof in specified form and this TCS amount will get reflected in 26AS of the buyer and TCS credit will be available to buyer.
These all 4 method are normal and routine provisions but Income tax law empowers to recover tax from other means too e.g. attachments of asset, distraint and sale of movable property, garnishee proceedings, adjustment with refund due of the assessee etc. and these methods can be used only there is default from the assessee when notice of demand has been issued to assessee (after exhausting advance tax, self assessment tax, TDS and TCS)
Disclaimer – Author has exercised utmost care while writing this article, but still this article may contain some error or mistake and no part of this article/writing should be construed or considered as any advice or consultancy whether professional or otherwise.