“Explore consequences of default in TDS payment – Interest, Assessee in Default, Penalty, Imprisonment, Compounding. Expert insights on Income Tax provisions, consequences, and ways to navigate TDS defaults. Source: Income Tax Act, India, TDS Payment, Legal Consequences.”
1) Interest Payment
As per Sec 201(1A)– If any person, principal officer or company does not deduct the amount of the tax as required, he or it shall be liable to pay simple interest, —
– at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted.
2) Assessee in Default
Section 201, (1) of the Income Tax Act expressly states that any person liable to deduct TDS on the payment made makes a default in the deduction and/or payment of TDS, shall be treated as “assessee in default” and penalty U/s 221 of Income Tax Act (stated below) shall be payable by the such assessee.
The only rescue given to assessee is that the TDS deductible in respect of a resident only, In simple words that is if the person to whom payment is made without deducting TDS does the following then the person who was liable to deduct TDS will not be treated as assessee in default:
> who has furnished his return of income under sub-sections of section 139 (not under any other section) and
> has taken into account such sum for computing the income and
> the due taxes paid on such income, shall not be considered for the purpose of section 221 of the Act on furnishing a certificate from a Chartered Accountant.
3) Penalty
As per Sec 221– When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears:
– Provided the assessee shall be given a reasonable opportunity of being heard:
– Provided if the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.
4) Imprisonment
As per Sec 276B, if a person fails to pay to the credit of the Central Government, —
(a) the tax deducted at source by him as required under this Act
he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.
The Central Board of Direct Taxes (CBDT), India has reworked specific norms that dictate the prosecution of tax defaulters. According to a circular released on September 9 via number F.No.285/08/2014-IT (Inv. V)/349,
Offences u/s 276B:
Failure to pay tax to the credit of the Central Government under Chapter XII-D or XVII-B.
Cases, where non-payment of tax deducted at source, is Rs. 25 Lakhs or below, and the delay in the deposit is less than 60 days from the due date, shall not be processed for
prosecution in normal circumstances that if both the condition satisfied related to amount and days then the case shall not be liable for prosecution but if any of the condition breaks says:
> TDS default amount is above 25 lakhs or
Delay in the deposit is 60 days or more
Then prosecution will be initiated against assessee and above said rigorous imprisonment will be applicable.
5) Compounding
Tax evaders can avoid a prison sentence by paying fees to the authorities to waive off the prosecution charges if official authorities find the reason for non-payment of taxes inappropriate, this is referred to as compounding of offences.
A tax defaulter needs to pay the following charges to compound an offence related to non-payment of taxes under Section 276B:
> 2% each or part of the month of the unpaid tax amount. This is applicable where IT Department communicates a tax defaulter in question has so moto filed an application for compounding of offence before any offence under 276B of the Income Tax Act to him or her. The compounding charges shall not exceed the total interest and TDS payments under Section 201(1A) if the unpaid TDS amounts to below 1,00,000.
> 3% each or part of the month of the unpaid tax amount when an individual defaults on tax payment for the first time.
> 5% each or part of the month in case of subsequent default in tax payment.
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About the Author : 
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.
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