1. Prosecution etc. : U/s. 276B If a person deducts tax at source etc. but fails to pay the same to the credit of Central Government as prescribed, he can be sentenced to rigorous imprisonment for a term not less than 3 months and extendable upon 7 years with fine as well. Moreover, u/s 276BB, similar punishment is provided for a person who fails to pay to the credit of Central Government taxes collected at source u/s. 206C being a seller of alcoholic liquor for human consumption, Tendu leaves, timber merchant, dealer in forest produce and dealer in scrap etc.
If a person fails to collect tax, he shall be liable to pay the tax to the Central Government account and also required to pay simple interest @ 1% per month from the date of such amount of tax was collectable to the date on which the tax was actually paid. Moreover, the tax and interest thereon shall be a charge upon the assets of the seller.
Rule 37E prescribes return regarding tax collected at source. Like T.D.S, the tax collected at source will also be deemed as payment on behalf of the person (assessee) from whom the amount has been collected and certificate will be given by the person (seller) who has collected the tax at source to the assessee (buyer) from whom the tax has been collected at source within one month from and of the month during which buyer’s account is debited or payment is received by him.
A person collecting any amount under this provision is required to pay the same within 7 days from the last day of the month to the credit of Central Government after the same has been collected from the buyer.
2. Penalty on Default : In case a person fails to deduct tax at source or after deducting fails to pay the tax to the Central Government account as prescribed by the Income-tax Act, he may be deemed to be an assessee in default in respect of this tax. In case of a Company, the Principal Officer shall also be treated to be an assessee in default.
3. Penalty : U/s. 221 of the Income-tax Act in such circumstances can be levied on such defaulter. Of course before levying any such penalty the defaulter will be given a reasonable opportunity of being heard and no penalty shall be charged, if such person/Principal Officer/Company satisfies the Assessing Officer that the failure to deduct the tax, or pay the same, was not without good and sufficient reason.
The penalty leviable shall not exceed the amount of tax in arrears i.e. Tax which was deductible at source as per prescribed rate of tax so deducted but not paid to the credit of Central Government Account.
If a person responsible for making TDS fails to deduct either whole or part of the tax required to be deducted under sections 192 to 195, or fails to furnish appropriate returns of TDS within prescribed time or fails to issue the TDS certificate to the person from whose income TDS is made within prescribed time, he will be liable to the following penalties :
|Section||Nature of Default||Minimum Penalty||Maximum Penalty|
|271C||Failure to deduct or pay the whole or any part of tax as required by or under chapter XVIIB or section 115-O or section 194B.||Amount of tax which such person has failed to deduct or pay.||Amount of tax which such person has failed to deduct or pay.|
|272A(2)(C)||Failure to furnish appropriate return of TDS within prescribed time.||Rs.100/- for every day during which default continues.||The amount of penalty shall not exceed the amount of taxDeductible or
at source .
|272A(2)(g)||Failure to issue the TDS certificate to theperson from whose
income TDS is made
within prescribed time.
|272A(2)(K)||Failure to deliver the statement u/s 200(3)or the proviso to
sub-section 3 of section
206C within prescribed
time (quarterly statementOnline GST Certification Course by TaxGuru & MSME- Click here to Join
of tax collection and
|272A(2)(L)||Failure to deliver the statement u/s 206A (i) within prescribed time. (quarterly return in respect of payment of interest to residents without deduction of tax )||-do-||-do-|
4. U/s. 203A, every person making TDS shall obtain Tax Deduction Account No. (TAN) from his/her Assessing Officer by making an application in duplicate in Form No.49B within one month from the end of the month in which the tax is first deducted. Failure to comply with this provision entails penalty u/s. 272 BB of Rs. 10,000.
5. Interest U/s. 201(A) – In addition to the penalty, the failure to deduct the tax or failure to pay the same after deduction also invites payment of simple interest on the amount of such tax from the date it was deductible to the date on which it is actually paid (Sec.201 (A)).
What is the rate of interest ?
If a person fails to deduct the whole or any part of the tax at source, or, after deducting, fails to pay the whole or any part of the tax to the credit of the Central Government within the prescribed time, he shall be liable to action in accordance with the provisions of section 201. Sub-section (1A) of section 201 lays down that such person shall be liable to pay simple interest.
Interest Rate w.e.f 01-07-2010
(i) at one percent for every month or part of the 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 and
(ii) at one and one-half percent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid. Such interest, if chargeable, has to be paid before furnishing of quarterly statement of TDS for each quarter.
Interest Rate Prior to 01-07-2010
(i) From FY 2006-07 onwards for delayed deposit, from date of deduction till actual date of payment, rate of interest is 1.0% p.m. In Other words Prior to 01.07.2010 there was no interest payable for the period of delay in deduction of TDS.
The tax which has not been paid after it has been deducted, alongwith the amount of simple interest thereon shall be a charge upon all the assets of the person/company who has failed to deduct or failed to pay the same to the credit of Central Government after deduction.
It has also been clarified that in addition to deduction at source the power to recover the taxes extends to any other mode of recovery provided under the Act. It means deduction at source is only one of the several modes of collection and recovery of taxes (Section 202).
Other consequences of non deduction
6. Interest on borrowed capital : In computing Business Income any expenditure laid out exclusively and wholly for the purposes of business or profession is allowed as a deduction against the profit and gain from business or profession. This may cover Royalties, technical fees or other sums.
Moreover, U/s.36(1 )(iii) specific provision is made to allow deduction in computing the income, of the amount of interest paid in respect of capital borrowed for purposes of business or profession. This also includes recurring subscription paid periodically by shareholders or subscriber in Mutual benefit Societies.
7. Disallowance of deduction : But if such interest, royalty, technical fees or other sums are payable outside India and the assessee has failed to deduct tax on it under Chapter XVII-B, the assessee shall not be allowed to deduct such payment while computing his own income. However if such tax is deducted and paid in any subsequent year then, in that year while computing his income the assessee can claim deduction.
Further as per Sec.40(a)(i), any interest, royalty, commission or brokerage, fees for professional service or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200, shall not be allowed to deduct such payment while computing his own income.
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Similarly for computing income under the Head “ other sources” u/s.56 and 57 – interest and salaries payable outside India shall be disallowed if tax at source has not been deducted (Sec.58(1)(a)(ii)(iii)). It may also be clarified that income of a non-resident by way of interest on notified securities or bonds including premium on redemption of bonds is not taxable. Same applies to interest income on Non-resident (External) account in any bank in India.
8. The Finance Act, 2008 has introduced an amendment in Section 201 (w.e.f. 1.6.2002) which clarifies that, in case any employer or a principal officer of a company
(a) does not deduct,
(b) or does not pay
(c) or after so deducting fails to pay the whole or any part of the tax, then such person shall be deemed to be an assessee in default. Further penalty to be charged u/s. 221 shall not be levied by the assessing officer unless he is satisfied that such failure to deduct and pay tax was without good and sufficient reasons.