prpri TDS provisions as amended vide Finance Act, 2020 TDS provisions as amended vide Finance Act, 2020

Article explains Amendments as passed by The Finance Act, 2020 on 27 March 2020 viz viz Amendments as introduced by The Finance Bill, 2020 on 1 February 2020 related to Section 194A and SECTION 197A by which Central Government Is Empowered To Provide For A Lower Rate Of TDS, Section 194J related to TDS In The Case Of Royalty In Respect Of Cinematographic Films, Section 194K  related to  TDS From Capital Gains Arising On Transfer Of Units Of Mutual Funds, Section 194N related to TDS on Payment of Certain Amounts In Cash and Section 194O  related to TDS by ‘E-Commerce Operator’.


Section 194A and Section 197A – Central Government Is Empowered To Provide For A Lower Rate Of TDS

SECTION Amendments as introduced by The Finance Bill, 2020 on 1 February 2020 Amendments as passed by The Finance Act, 2020 on 27 March 2020
Interest other than ‘Interest on Securities’ [Amendment to Section 194A]

No Deduction to be made In certain cases [Amendment to Section 197A]

–     As per section 194A of the Act, every person (other than an individual or HUF, whose turnover or gross receipts during the preceding year does not exceed INR 1 crore in the case of business and INR 50 lakhs in case of the profession) is required to deduct tax at the rate of 10 per cent from interest, other than on securities, paid or payable to a resident person.

–     Section 194A(3) contains various clauses, inter-alia, clause (i) to clause (xi), to provide an exemption from deduction of tax in certain cases.

–     For instance, as per clause (iii), no tax is required to be deducted by a person from the interest paid or payable to a Bank, Financial Corporation, Insurance Company or such other institutions or bodies as may be  notified  by  the  Central  Government.  Various persons had been notified for this purpose by the Government through various notifications.

–     The   Finance   Act, 2020   has   amended   section  194A(3)(iii) to provide that no notification shall be issued by the Central Government in respect of the said clause on or after 01-04-2020.

–   A new section 194A(5) has been inserted to provide the  absolute  powers  to  the  Central  Government whereby in addition to notifying the cases where no tax shall be deducted, the Government shall also have the power to provide for the lower rate of tax in certain cases.

–     Consequential  amendments  have  been  made  to section 197A.

–     As per current provisions of Section 197A(1F), no deduction of tax shall be made from the specified payment to such institution, as may be notified by the Central Government in this behalf.

–     Section 197A(1F) has been substituted, to empower the  Central  Government  to  notify  the  specified  payments for both nil deduction of tax and lower deduction of tax.

–  The new sub-section provides that no deduction of tax shall be made or deduction of tax shall be made at  a specified lower rate in cases of persons, or class of persons, institutions, etc., notified by the Central Government.

VTPA Comments –     The Central Government thereby has been granted the absolute power for providing for non-deduction or deduction of tax at lower rate in respect of any person or class of persons.

Section 194J – TDS In The Case Of Royalty In Respect Of Cinematographic Films

SECTION Amendments as introduced by The Finance Bill, 2020 on 1 February 2020 Amendments as passed by The Finance Act, 2020 on 27 March 2020
Fess for professional or technical services [Amendment to section 194J] –     The Finance Bill, 2020 had proposed to reduce the rate for tax deducted at source (TDS) in respect of fees for technical services (other than professional services) to two per cent from existing ten per cent.

–     The TDS rate in other cases under section 194J would remain the same at ten per cent.

–     These amendments will take effect from 1 April 2020.

–     The Finance Act, 2020 has now amended to also reduce  the  rate  for  TDS  in  respect  of  fees  for technical services (not being a professional service, or royalty where such royalty is in the nature of  consideration for sale, distribution or exhibition of cinematographic films) to two per cent from existing ten per cent.

–     Thus, reduced rate of tax deduction of two per cent would now be applicable to royalty income arising to a person by way of sale, distribution or exhibition of  cinematographic films.

VTPA Comments –     Lowering the withholding rate of tax in respect of the film industry may ease their business process, however it needs  to be seen how the sale of a film would give rise to royalty income, as a sale of any property would result in business  income or income from capital gains.

Section 194K – No TDS from Capital Gains Arising On Transfer of Units Of Mutual Funds

SECTION Amendments as introduced by The Finance Bill, 2020 on 1 February 2020 Amendments as passed by The Finance Act, 2020 on 27 March 2020
Income in respect of units of Mutual Funds

[Amendment to Section 194K]

–     In the new regime of taxation of income distributed by mutual funds,  wherein  the  unit  holder of  a mutual fund is to be taxed, due to the abolition of tax on distributed income to unit holders under  section 115R, a new section 194K was proposed to be inserted, to provide that any person responsible for paying to a resident any income in respect of:

–      units of a Mutual Fund specified under section  10(23D) or

–     units from the administrator of the specified undertaking or

–     units from the specified company

–     shall at the time of credit of such income exceeding INR 5000 to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax there on at the rate of ten per cent

–     The term ‘Administrator’, ‘specified company’ and  ‘specified   undertaking’   have   been   defined   in Explanation 1 to section 194K

–     These amendments will take effect from 1 April 2020

–     Various queries were received from stakeholders to the effect that whether under the proposed section 194K, the Mutual Fund would be required to deduct TDS also on the capital gains arising on redemption of units.

–     The CBDT vide Press release, dated 4 February 2020, has clarified that the tax under this provision is required  to  be  deducted  only  from  the  dividend payment. No tax is required to be deducted from the sum payable which is in the nature of capital gains.

–     The Finance Act, 2020 hence clarifies that payment by a mutual fund to the unit holders, in the nature of capital gains would not suffer any withholding tax under section 194K.

VTPA Comments –     The amendment clarifies that the words ‘payment of any income in respect of units…’, does not include payments in the nature of which the income is capital gains.

Section 194N – Payment Of Certain Amounts In Cash

SECTION Amendments as introduced by  The Finance Bill, 2020 on 1 February 2020 Amendments as passed by The Finance Act, 2020 on 27 March 2020
Payment of certain amounts in cash [Amendment to Section 194N] –     The section provided that a banking company, co- operative bank or a post office is responsible for deducting tax at the rate of two per cent, for any amount withdrawn from a savings or current bank account in aggregate, exceeding INR one crore.

–     The Finance Act, 2020 has now made the provision more stringent and states that:

–     a recipient who has not filed the return of income for three preceding financial years immediately  preceding the financial year,

–     in which the payment of the sum is made to him,

–   the provision of said section 194N of the Act would apply

–   so that the tax to be deducted would be:

–   at  the  rate  of  two  per  cent,  if  the  cash  withdrawal in a year is more than INR 20 lakh but does not exceed INR 1 crore (on amount  exceeding INR 20 lakh) and

–     at  the  rate  of  five  per  cent,  if  the  cash withdrawal exceed INR 1 crore (on amount exceeding INR 1 crore)

–     The Central Government would be empowered to exempt other recipients, through a notification in the Official Gazette in consultation with the Reserve Bank of India.

–     The amendments in this section shall be inserted with effect from 1 October 2020.

VTPA Comments –     This provision could cause hardship in the rural economy where the transaction medium is still in cash.

Section 194O – Definition Of ‘E-Commerce Operator’ Amended

SECTION Amendments as introduced by The Finance Bill, 2020 on 1 February 2020 Amendments as passed by The Finance Act, 2020 on 27 March 2020
Payment of certain sums by e-commerce operator to e-commerce participant [Amendment to Section 194-O] –     A new section 194-O was inserted in respect of e- commerce transactions, so as to provide for a new levy of TDS at the rate of one per cent, in respect of the following:

The TDS is payable on the gross amount of the sale of goods or provision of service facilitated through the  e-commerce  operator’s  digital  or  electronicb facility or platform.

–     E-commerce operator is required to deduct tax at the time of credit of or payment of the sale or service or both to the e-commerce participant’s account, whichever is earlier.

–     Further, any amount paid by a purchaser of goods or recipient of services directly to an e-commerce participant, facilitated by the ecommerce operator, shall be deemed to be included in the gross amount of  such  sales  or  services  for  the  purpose  of deduction of income-tax.

–     However, if the e-commerce participant of such sale or service is an individual or a HUF, then the TDS liability would only arise if the sum credited or paid during the previous year to such person exceeds five lakh rupees and such e-commerce participant has  furnished  his  Permanent  Account  Number (PAN)  or  Aadhaar  number  to  the  e-commerce operator.

–     Consequential amendments are made in section 197 (for lower TDS), in section 204 (to define person responsible for paying any sum) and in section 206AA (to provide for tax deduction at five per cent,  in  cases  where  PAN/  Aadhaar  are  not provided).

–     Section 204 has inserted clause (v) to state that the person responsible for deducting TDS: “in the case of a person not resident in India, the person himself or any person authorised by such person  or  the  agent  of  such  person  in  India including any person treated as an agent under  section 163”

–     The  terms ‘electronic  commerce’, ‘e-commerce operator’, ‘e-commerce participant’, ‘services’ have  been defined in the new section.

–     These amendments will take effect from 1 April  2020.

–     The Finance Act, 2020 now empowers the Central Board of Direct Taxes (CBDT) to issue guidelines for removing the difficulties arising in giving effect to  the  provisions  of  section 194-O.  Each  such guideline   shall   be   binding   on   the   Income-tax authorities and the e-commerce operator.

–     Further, the definition of e-commerce operator has been amended, so as to remove the condition that requires an e-commerce operator to make payment to e-commerce participant.

The Finance Act, 2020 also provides that for the purpose of this section e-commerce operator shall be deemed to be the person responsible for paying to e-commerce participant.

VTPA Comments –     The new section aims to bring to tax the income of e-commerce operators and needs to be read in conjunction with the new provisions of equalisation levy, discussed in the Bulletin later. The amendment gives power to the CBDT to issue guidelines after taking approval from the Central Government so as to facilitate the smooth implementation of the new law.

–     Further, the dichotomy, whereby the condition that the e-commerce operator is responsible to make payment to the e- commerce participant has been removed; as in reality the customer could make payment directly to the e-commerce participant, and it is not necessary that payments from customers would have to be routed through the e-commerce operator.

–     These new provisions are fraught with complexity and would fasten liability of withholding taxes on non-residents, though they may have no tax liability in India, which would be a burdensome requirement on persons not covered under the Act.

–     Further, the requirement to withhold taxes on a deemed receipt basis, when the moneys do not flow through the e- commerce operator is inequitable and impractical. It would be need to be seen how this scheme of taxation evolves

along-with the new equalisation levy on non-resident e-commerce operators, as these provisions may lead to litigation.

–     It also needs to be seen how due to the health pandemic prevalent globally and social distancing norms being mandated, how these provisions on e-commerce operators marry with today’s economic scenario.

–     Further, it has been witnessed that any attempt to tax the technology participants, who are monopolists economically, only results in the burden being passed on to the individual consumer.

–     This only results in the middle class subsidizing the large corporations, as economically they have no bargaining power vis-à-vis the technology monopolists. The price of goods or services consumed would therefore increase, resulting in these hapless consumers paying the taxes indirectly to the government, a paradox, which needs to be resolved equitably by the government!!

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August 2021