Section 197 of Income Tax Act, 1961 contains the provisions for Lower Deduction Certificate. Generally, where the actual income tax liability on the income of the assessee is less than the TDS which has been deducted by the payer as per Chapter-XVII, then it may cause a major problem of working capital management for the assessee. The solution is, file an application for LDC i.e. Lower Deduction Certificate with Income Tax Authorities.
Before understanding the proceeding, I would like to lay down the payments/incomes on which TDS will be deducted as per Chapter XVII covered under section 197,
No application can be filed under section 197 for the purpose of payment other than above mentioned.
LDC facilitates the payment of certain sum on deduction of TDS at a lower rate. It ultimately saves the assessee from the repercussions of the higher TDS deduction which cause an imbalance in the working capital requirement of the assessee. Assessee will get the higher disbursement from their customer as TDS amount will be on a lower side.
Below is the most common situation where LDC is beneficial for the assessee,
1. Receipt of the payment for the sale of property in India by a non-resident seller from the Indian buyer: This is the most common situation we come across as professional chartered accountant where a non-resident sells his property in India to the Indian buyer and that Indian buyer disburse the sale consideration after deducting TDS at the rate of 20% on the whole value regardless the gain that seller has actually earned from the property.
2. Receipt of the payment by a company who does not have PE in India from the customer who is liable to deduct TDS under section 195: Generally, the Indian counterpart, while making payment to the Foreign company who does not have PE in India deduct TDS at the rate of 40% treating them as PE in India. By filing an application under section 197, such company may mitigate the higher TDS and may get a certificate for deduction of TDS at the rate as per DTAA provisions.
3. Where a assessee’s NP ratio is low or assessee is in loss: In this case the TDS is deducted by the payer at full rate as per Chapter XVII regardless the actual taxability of the payee. Where the assessee is in loss or earning at relatively low NP ratio, the actual Taxability of the assessee is quite low or nil (in case of loss). By applying for LDC, such assessee may lower their TDS amount and ultimately may mitigate the working capital crisis.
There are other cases also where assessee can get LDC from Income Tax Department and mitigate their TDS amount.
The process of filing the application for LDC: Rule 28 of Income Tax Rules governs the procedure of filing application. The application shall be filed in Form 13 on TRACES portal by logging in as ‘Taxpayer’.
Below are the steps for the whole process,
Step-1: Logging in TRACES portal.
After login in, below screen will appear,
Step-2: From ‘Statements/Forms’ menu select ‘Request for Form 13’
By clicking this option, below screen will appear,
Select the option as appearing on the screen. If we are applying for a non-resident person or a foreign company, then select ‘Non Resident’ or ‘Not Ordinarily Resident’ as the case may be and if we are applying for a resident assessee, then select ‘Resident’.
Step-3: Select ‘Request Type’ as ‘Original’ and then select Financial Year for which we are applying for LDC. Then click on ‘Proceed’.
Step-4: After step-3, a detailed Form 13 will appear on the screen and below mentioned details shall be filled,
Step-5: Next, below screen will appear,
Select the ‘Annexure-I’ and click on ‘Proceed’ button.
Step-6: After step-5, below table will appear which needs to be filled up,
In this table we need to fill the details of the deductor like TAN, section under which TDS to be deducted, nature of payment (which will be selected from the drop down menu), Estimated amount and tax rate at which the assessee wishes to apply.
At last, supporting documents shall be attached by clicking on the respective links as below,
Document shall be attached by clicking on ‘Browse’ button as provided against each document description. A template shall also be filled up by clicking on ‘Template’ button.
After uploading all the documents, click on ‘Preview & Submit’ button and a preview will be appeared on screen where you can cross check all the details and download the preview as well. After that you can submit the Form by using DSC or mobile OTP.
After submission of Form 13, the Jurisdiction will be assigned automatically within 2 or 3 days. The assessing officer may raise further query which can be replied online on the link which will be there when you check the status of your application.
Below are the documents to be attached along with the Form 13,
The certificate once issued by the authority can be downloaded from the link which will be available when you check the status of the application.
Author is Amit Jindal, ACA working as Manager Taxation in Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India.