Extension of validity of Lower or Nil Tax Deduction/Collection Certificate

A quick analysis of the CBDT notification dated 31.03.2020 extending the validity of Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20

Introduction:

Due to COVID-19 pandemic, all establishments including the income tax office are not working to full capacity and hence the income tax officers were unable to issue certificates u/s. 197 of the Income Tax Act, 1961, for lower deduction of tax on time causing hardships to businesses. As a result, the CBDT has come up with a circular relaxing these provisions and extending the validity of already issued Lower or Nil Tax deduction/collection certificates under sections 195/197/206C of the Act FY 2019-20 up to 30^th June, 2020 or the date of disposal of the application by AO whichever is earlier.

The main crux of the notification:

The notification broadly deals with the following three categories of assesses.

1. Assesses who are holding a valid Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20 ‘AND’ have applied for a new LOWER OR NIL TAX DEDUCTION/COLLECTION CERTIFICATE for FY 2020-21 but their application is pending approval:

In the above case, the validity of the existing certificate for FY 2019-20 has been extended up to 30.06.2020.  This means that deductors can rely upon the Lower or Nil Tax Deduction/Collection Certificate of FY 2019-20 given by their deductees up to 30.06.2020 or the date of disposal of the same by AO whichever is earlier. However, deductors should note that this benefit can be given only to those deductees who hold a valid Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20. Further, the rate of tax deduction should be as per the old Lower or Nil Tax Deduction/Collection Certificate of FY 2019-20 and not as per the new one applied.

2. Assesses who are holding a valid LOWER OR NIL TAX DEDUCTION/COLLECTION CERTIFICATE for FY 2019-20 but could not apply for a new one for FY 2020-21 on the TRACES portal:

In the above case too, the validity of the existing certificate for FY 2019-20 has been extended up to 30.06.2020. However, CBDT has insisted that such assesses apply for a New Lower or Nil Tax Deduction/Collection Certificate with the AO as soon as possible or as soon as normalcy resumes or 30.06.2020 whichever is earlier.  This means that deductors can still rely upon the Lower or Nil Tax Deduction/Collection Certificate of FY 2019-20 given by their deductees up to 30.06.2020 or the date of disposal of their application by AO whichever is earlier. However, again, an essential condition is the possession of a Valid Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20 by the deductees without which this benefit cannot be given.  Rate of tax deduction will be as per the old Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20.

To avoid any confusion, I clarify that the benefit cannot in any of the two cases be given to a deductee who does not hold a valid Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20 but has just applied one for FY 2020-21 and his application is pending for disposal.

3. Non resident assesses who are not covered by any of the above two categories (i.e. where they do not hold any Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20):

With respect to non-resident assesses (including foreign companies) having a Permanent Establishment (PE) in India who are not covered by the situations mentioned above (i.e. they do not have an existing lower / nil TDS certificate for the FY 2019-20), tax is to be deducted at 10 percent plus surcharge and cess on payments to be made till 30 June 2020, or disposal of their applications if any made, whichever is earlier. Thus, a concession of deducting TDS @ 10% + Surcharge and Cess has been given to non-residents even if they have no Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20 irrespective of any other condition.

Our observations:

To bring in more clarity, I have to clarify that for all assesses who hold a valid Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20, the validity of their Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20 can be extended till 30.06.2020 or the date of disposal of the application (if any) by the AO whichever is earlier. This is irrespective of whether they have applied for a new Lower or Nil Tax Deduction/Collection Certificate for FY 2020-21 or couldn’t apply for the same.

Further, the rate of tax deduction shall be as per the old Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20.

For Non residents those who do not possess a valid Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20, irrespective of whether they have applied for one in FY 2020-21 or not, tax can be deducted at 10% plus surcharge and cess. However, this concessional rate of 10% plus surcharge and cess is applicable only to Non-resident assesses without a Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20 and not for resident assesses without a Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20.

Difficulties that maybe faced by Tax deductors:

The CBDT has clarified that the tax deductors can rely upon the Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20 till 30.06.2020 or the date of disposal of the application (if any) by the AO whichever is earlier. However, they have not mentioned anything about the consequences of short deduction/ non deduction that the Tax deductors may face in case of

• The first category of deductees , if their Lower Or Nil Tax Deduction/Collection Certificate for FY 2020-21 gets rejected or the rate changes.
• In second category, if the deductees don’t apply for a certificate at all in FY 2020-21.

There is no clarification by the CBDT in this regard. However, we can interpret that since the CBDT has extended the validity of the Lower Or Nil Tax Deduction/Collection Certificate for FY 2019-20 upto 30.06.2020 or disposal of application by the AO whichever is earlier, the tax deductors will have no penal consequences for short deduction as the circumstances of the Lower Or Nil Tax Deduction/Collection Certificate for FY 2020-21 getting rejected or the deductees not applying at all is beyond the control of the tax deductors.

Further, since the validity of the Lower or Nil Tax Deduction/Collection Certificate for FY 2019-20 is only up to 30.06.2020 or the date of the disposal of the application by AO whichever is earlier, it is apparent that tax deductors need to keep track of the application status of each of its deductees.

To be on a safer side, the tax deductors can thus take a declaration from each of such deductees stating that the application has been made and that the papers being shared with the deductors are all genuine and that deductees shall inform all updates of their application status to the tax deductor truly and also the deductees should give an  indemnity Bond ( where the amount of differential of TDS between the Income Tax Act and actuals TDS as per their declaration/ Certiicates amount is huge) of any penal consequences under the Income Tax act by deductees in case of  misrepresentation by such deductees.

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