Increasing Compliance on Non Audited Individuals / HUFs With Respect To Deduction of TDS/Collection of TCS

Do you know that high value payments or receipts made by non-audited individuals or HUFs have now come under the compliance net of direct taxes through TDS or TCS applicability? 

In case of individuals or HUFs, whose books of accounts for the previous financial year had not been subjected to audit under Income Tax Act, 1961 (‘Act’), there has been an increasing trend in the requirement to deduct tax or collect tax while indulging in high value transactions. These steps are a part of Government’s effort to widen and deepen the direct tax base and increase the financial accountability of such individuals and HUFs.

Male corporate auditor is touching the term COMPLIANCE on an interactive virtual control screen

Deduction or collection of tax at source, payment to the government and issuance of Tax Deducted at Source (‘TDS’) / Tax Collected at Source (‘TCS’) certificates are a time consuming and complex processes. Prior to 2013, bearing a couple of them, the compliance of TDS and TCS in case of individuals or HUF was only restricted to the class of taxpayers whose books of accounts in the previous financial year were subjected to tax audit under the Act, that is individuals or HUFs carrying on a business or profession with total turnover or gross receipts exceeding ₹ 1 Crore or ₹ 50 lakhs respectively. Due to this threshold, majority of individuals or HUFs were kept out of the ambit of TDS or TCS compliance and thereby high value payments made by such persons was escaping the levy of TDS/TCS, leaving a loophole for possible tax evasion on incomes received by the recipients. However, at present, even if you do not carry on a business or profession, or carry on a small business or profession which is not liable to tax audit, there are quite a few obligations to deduct TDS / collect TCS

Type Nature Of Transaction % of Ded uction/ Coll ection Threshold Limit Income Char geable Under the Head (For Deductee) Se ction Effe ctive Since
TDS Any person being an employer pays any income chargeable under the head ‘Salaries’ shall, at the time of payment or credit whichever is earlier, shall deduct TDS on that amount As per Slab Rates Salary paid > basic exemption limit of ₹ 2.5 Lakhs per annum Income From Salaries 192 1st April 1961
TDS Any Individual or HUF, not having turnover exceeding  ₹1 Crore / ₹50 Lakhs from business /profession, paying to a resident any income by way of rent has to deduct TDS 5.00% The payment of rent exceeds      ₹ 50,000 per month Income From House Property 194IB 1st June 2017
TDS Purchaser of immovable property has to deduct the TDS, either at the time of executing the deed or at the time of payment of advance through cash or by cheque or draft or by any other mode. 1.00% If the consideration is ₹ 50 lakhs Capital Gains 194IA 1st June 2013
TDS A person who pays consideration (not in kind) to the landlord under a Joint Development Agreement (JDA) must deduct TDS under this section. 10.00% All Transactions Capital Gains 194IC 1st June 2017
TDS Any Individual or HUF, not having turnover exceeding       ₹1 Crore / ₹50 Lakhs from business / profession, paying to a resident any income for carrying out any contractual work or commission or brokerage or professional fees need to deduct TDS 5.00% If the consideration is > ₹ 50 lakhs Profits And Gains From Business And Profession 194M 1st Sept 2019
TDS Any person responsible for paying any non-resident/ foreigners, income chargeable under any head (except Salary) shall deduct TDS under this section Income Tax Rate applicable for NRI / foreigners All Transactions All Heads (Except Salary) 195 1st April 1961
TCS Any person being an authorised dealer, who receives any amount for remittance out of India from any resident Indian shall collect additional amount as TCS over and above the amount of remittance 5.00% If the consideration is ≥ ₹ 7 Lakhs 206C

(1G)(a)

1st October 2020
If the amount remitted out of India is for pursuing any education 0.50%
TCS A seller of an overseas tour program or package, who receives any amount from a buyer, shall collect additional amount as TCS over and above the package 5.00% All Transactions 206C

(1G)(b)

1st October 2020

List of such obligations on non-audit Individuals and HUFs which attract TDS/TCS compliance are as follows:

Note:

1. Rate of TDS shall be 20% for the above transactions where the Permanent Account Number (‘PAN’) of the deductee (receiver of income) is not available ( Section 206AA);

2. Rate of TCS shall be double the specified rate or 5% whichever is higher for the above transactions where PAN of the deductee (receiver of income) is not available ( Section 206CC);

3. For FY 2020-2021, all the above rates of TDS and TCS have been reduced by 25% on account of COVID-19 pandemic.

4. For Individuals and HUFs carrying on business having turnover exceeding ₹1 Crore but not exceeding ₹2 Crores, have an option to pay tax on presumptive profits. Such persons are exempted from getting their books of accounts audited under the Act. However, they are not exempted from TDS or TCS compliance and they would be required to comply with the above sections (except 194IB & 194M) as well as all the other sections of TDS and TCS.

Future scope of widening such applicability on other similar transaction:

An observation of the dates mentioned in the column ‘Effective Since’ of the above table will make us realise that these scope of compliance is going to be widened even further in near future. A calculated guess can be made that apart from reducing the threshold limits of the above transactions, following transactions that would be carried out by individuals or HUF, may also be subjected to TDS or TCS compliance in order to widened the tax base:-

Payments made by individuals and HUFs which form part of the Deductee’s income under the head of ‘Incomes from Other Sources’; or

 Capital Gains arising from transfer of movable properties.

Authors:

Vishal Kothari | Partner
Email – vishal.kothari@masd.co.in
Ashish Raithatha | Consultant
Email – ashish.raithatha@masd.co.in
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