Section 271C of the Act has provisions for penalty for failure to deduct tax at source. Under this section, a person who has failed to deduct whole or part of tax as required under provisions of Chapter XVII-B (Tax Deduction at Source – TDS) or pay the whole or part of tax as required under section 115-O (Tax on distributed profits) or under proviso to section 194B (tax on winnings from crossword, lottery, puzzles etc) is liable to pay penalty of sum equal to the amount of tax he failed to deduct or pay. Section 276B of the Act makes provisions for prosecution for failure to pay tax to the credit of Central Government under Chapter XII-D (as required under section 115-O) or under XVII-B (deduction at source).
2. Two new provisions – section 194R and section 194S were introduced in the Act vide Finance Act, 2022. Section 194R makes provisions for deduction of tax on benefit or perquisite in respect of business or profession. In addition, section 194BA is proposed to be inserted in the Act vide the Bill to provide for TDS on net winnings from online games.
3. Section 194S makes provisions for deduction of tax on payment on transfer of virtual digital asset (VDA) owing to their very nature, payments related to benefit or perquisite or VDA may also be wholly in kind or partly in cash and partly in kind. Accordingly, the first proviso to section 194R provides that in case the benefit or perquisite or VDA has a “in kind” component, then the person responsible shall ensure that required amount of tax has been paid, before releasing the benefit or perquisite.
4. In the case of VDA, since the consideration for transfer could be in exchange of another VDA (fully “in kind”) or partly in kind, the first proviso to section 194S provides that the person responsible for paying the consideration shall ensure that the required amount of tax has been paid, before releasing the consideration.
5. Similarly, in the case of winnings from online games, sub-section (2) of the proposed section provides that where the net winnings are wholly in kind or partly in cash and partly in kind, the person responsible for paying the net winnings shall ensure that tax has been paid in respect of the net winnings, before releasing the winnings.
6. Presently, the provisions for penalty and prosecution do not clearly mandate a penalty or prosecution for a person who does not pay or fails to ensure that tax has been paid in a situation where the benefit or perquisite is passed in kind. Therefore, to enable such penalty and prosecution, it is proposed to amend section 271C inserting two new sub-clauses under clause (b) in sub-section (1) providing reference to the first proviso to section 194R and the first proviso to section 194S. Similar amendments are also proposed in section 276B. Drafting changes are also proposed in the section to align the language with the parent provisions.
Prosecution for non deduction of TDS under section 194S & 194R
7. These amendments will take effect from the 1st day of April, 2023.
8. Further, in consequence to the proposal to insert section 194BA in the Act, it is proposed to insert a new sub-clause under section 271C and section 276B providing reference to subsection (2) of section 194BA.
9. This amendment will take effect from the 1st day of July, 2023.
[Clauses 113 & 119]
Extract of relevant clause of Finance Bill 2023
Clause 113 of the Bill seeks to amend the section 271C of the Income-tax Act relating to penalty for failure to deduct tax at source.
It is proposed to amend clause (b) of sub-section (1) of said section so as to provide that a person shall be liable to pay penalty under that section for failure to ensure payment, in addition to failure of payment, of whole or any part of tax as required under the provisions.
It is further proposed to amend the said clause to provide that a person shall be liable to pay, as penalty, a sum equal to the amount of tax which such person failed to ensure payment of.
These amendments will take effect from 1st April, 2023.
It is also proposed to amend the said clause to give reference of sub-section (2) of section 194BA.
This amendment will take effect from 1st July, 2023.
It is also proposed to amend the said clause to give reference of the first proviso to subsection (1) of section 194R and the proviso to sub-section (1) of section 194S therein.
This amendment will take effect from 1st April, 2023.
Clause 119 of the Bill seeks to amend the section 276B of the Income-tax Act relating to failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B.
It is proposed to amend clause (a) of the said section so as to make it applicable if a person fails to pay to the credit of the Central Government the tax deducted at source by him as required by or under the provisions of Chapter XVII-B.
It is further proposed to substitute clause (b) of the said section to provide that failure to pay tax or ensure payment of tax, to the credit of the Central Government as required by or under sub-section (2) of section 115-O, the proviso to section 194B, the first proviso to sub-section (1) of section 194R or the proviso to sub-section (1) of section 194S shall be eligible for initiating proceedings under the section.
These amendments will take effect from 1st April, 2023.
It is also proposed to provide in the said clause that failure to pay tax or ensure payment of tax, to the credit of Central Government as required under sub-section (2) of section 194BA shall be eligible for initiating proceedings under that section.
This amendment will take effect from 1st July, 2023.
Extract of Relevant Amendment Proposed by Finance Bill, 2023
113. Amendment of section 271C.
In section 271C of the Income-tax Act, in sub-section (1), –
(A) in clause (b),–
(I) for the words “pay the whole”, the words “pay or ensure payment of, the whole” shall be substituted;
(II) in sub-clause (i), the word “or” shall be omitted;
(III) after sub-clause (ii), the following sub-clauses shall be inserted, namely:–
“(iii) the first proviso to sub-section (1) of section 194R; or
(iv) the proviso to sub-section (1) of section 194S; or”;
(IV) after sub-clause (iv) as inserted by the Finance Act, 2023, the following sub-clause shall be inserted with effect from the 1st day of July, 2023, namely:–
“(v) sub-section (2) of section 194BA,”;
(B) in the long line, after the words “deduct or pay”, the words “or ensure payment of,” shall be inserted.
119. Amendment of section 276B.
In section 276B of the Income-tax Act,–
(A) in the opening portion, the words “pay to the credit of the Central Government” shall be omitted;
(B) in clause (a), for the words “the tax deducted”, the words “pay to the credit of the Central Government, the tax deducted” shall be substituted;
(C) for clause (b), the following clause shall be substituted, namely:–
‘(b) “pay tax or ensure payment of tax to the credit of the Central Government, as required by or under–
(i) sub-section (2) of section 115-O;
(ii) the proviso to section 194B;
(iii) the first proviso to sub-section (1) of section 194R;
(iv) the proviso to sub-section (1) of section 194S; or’;
(D) after sub-clause (iv) of clause (b) as substituted by the Finance Act, 2023, the following sub-clause shall be inserted with effect from the 1st day of July, 2023, namely:–
“(v) sub-section (2) of section 194BA,”.
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