Section 194A TDS on Interest to NBFCs: Compliance and Challenges

Non-Banking Financial Companies (NBFCs) play a crucial role in providing financial support to businesses. However, what many businesses may not realize is that there are Tax Deducted at Source (TDS) obligations associated with interest payments made to NBFCs. This article explores Section 194A of the Income Tax Act, shedding light on the TDS requirements and the challenges businesses face in complying with them.

Detailed Analysis

Sec 194A and TDS Obligations: Section 194A of the Income Tax Act mandates that businesses must deduct a 10% tax on interest payments made to residents who are not classified as Banks, Insurance companies, or other specified exceptions. Interestingly, NBFCs do not fall into the exception category, which means that businesses are obligated to deduct a 10% tax on interest payments to NBFCs.

Consequences of Non-Compliance: Failing to deduct the required tax can lead to significant consequences. In such cases, the interest amount can face a 30% disallowance in the hands of businesses. This, in turn, could result in up to 30% tax on the disallowed amount, translating into a 9% tax cost for businesses. Furthermore, non-compliance may trigger penalties and prosecution by the tax department.

Challenges in TDS Compliance: Complying with TDS on interest payments to NBFCs is not without its challenges. One significant hurdle is the practical difficulty in deducting tax during the payment of Equated Monthly Installments (EMIs) to NBFCs. Payment portals may not accept payments less than the full EMI amount, making it impossible for businesses to deduct tax on the interest component of EMIs.

Potential Solutions: To address this deadlock, a practical process is being followed:

i. Identify Interest Component: Businesses need to examine the loan repayment schedule provided by NBFCs to identify the interest component within each EMI.

ii. Calculate and Pay TDS: Once the interest component is identified, businesses can calculate TDS at the rate of 10% on this amount. They must then pay the TDS out of their own pocket.

iii. Report TDS: Businesses should report the TDS paid in their E-TDS returns.

iv. Generate TDS Certificates: After processing the TDS Returns, they can generate TDS certificates (in Form 16A).

v. Apply for Refund: To recover the TDS paid out of pocket, businesses can submit a refund request letter to the NBFC.

Until NBFCs are brought on par with banks for TDS purposes by the government, businesses will continue to face these challenges.

Format of TDS Refund Request Form

TDS refund request form for refund request to NBFC

Conclusion

TDS compliance on interest payments to NBFCs is a complex issue that businesses must navigate. The legal requirement to deduct 10% tax on such payments can have financial implications and may lead to penalties if not adhered to. While practical challenges exist, businesses can follow the outlined process to ensure compliance and seek refunds for TDS paid out of pocket. Staying informed and proactive in addressing TDS obligations is essential for businesses to avoid financial penalties and maintain good standing with tax authorities.