In a bid to tighten screws on defaults or under reporting of tax deducted at source liabilities by companies, the Income Tax department has decided to be more frugal in granting the zero or low taxability status, according to a source in the department.

Entities are awarded a certificate of lower deduction or non-deduction of tax at source on receivables under Section 197 of the Income-tax Act, 1961. “This is generally for cases where the tax payee is not profitable or there is likely to be no tax liability on him at the end of the year. However, we have found several cases of misuse,” the source said.

Poor collection of tax deducted at source in FY10 has resulted in the I-T department getting stricter on these exemptions. In 2009-10, the department collected only around Rs 40,400 crore in the form of tax deducted at source, almost flat from previous year, which was far short of the target of Rs 52000 crore set by the finance ministry.

The IT department had issued a circular in end-December instructing assessing officers not to issue 197-certifcates indiscriminately.

“…power of issue of certificates under Section 197 would ordinarily be exercised by the officers manning TDS administration. However, instances are being brought to the notice of Board that the assessing officers are issuing certificates for lower or non-deduction of tax at source under Section 197 indiscriminately, in contravention of relevant Income Tax Rules and Instructions,” the department circular noted.

“It has now been mandated that issue of these certificate will be only after the officer gets approval from the concerned joint commissioner (of income tax) or additional commissioner or the chief commissioner,” the source said.

The circular further mandated that prior administrative approval of the commissioner of income tax — TDS is mandatory in case the cumulative amount of tax foregone by non-deduction or lesser rate of deduction of tax arising out of certificate 197 during a financial year is over Rs 50 crore in eight metros. The cities are Delhi, Mumbai, Chennai, Kolkata, Bangalore, Hyderabad, Ahmedabad and Pune.
For all other places, the approval of the commissioner will be necessary in case the tax liability is over Rs 10 crore.

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