Introduction
Tax Deducted at Source (TDS) is a scheme launched by the Government of India for deduction of tax at the very source of income. It ensures each payment made will carry some portion of taxes being deducted, thus discouraging evasion of tax and ensuring a steady inflow of income. Through TDS, the Indian government is able to keep an eye and control tax collection in a very effective manner, thus preventing any scope of under-reporting of income.
Legal Framework
TDS is controlled by Chapter XVII-B of the Income Tax Act, 1961. The person deducting the tax or the deductor is expected to deduct tax before payment of salary, interest, rent, commission, and professional charges. Such tax that has been deducted should be deposited with the Income Tax Department within the time specified. If the person fails to do so, he could be levied a penalty and interest thereon.
The TDS has a very simple mechanism to pass on the burden of tax from one taxpayer to another; so the taxpayer cannot escape the payment of tax since income is taxed as it accrues rather than at the end of the accounting year.
Major Sections and Applicability
TDS provisions are applicable on different types of payments, and different rates are mentioned under different sections. A few of the major sections are:
Section 192 – TDS on Salary: The employer deducts the TDS on an employee’s estimated income for the year. The deduction differs with the relevant income tax slab rates and exemptions enjoyed by the employee.
Section 194A – TDS for Tax Deducted at Source on Interest (except Interest on Securities): Interest paid on fixed deposits, recurring deposits, and ,on unsecured loans of more than Rs.40,000 (Rs.50,000 in case of senior citizens) is subject to TDS. In some exceptional situations, in case of the above three categories of deposits, interest over Rs.40,000 is made subject to the TDS based on situations.
Section 194C – TDS on Contractors: 1% (in case of individuals/HUFs) or 2% (in case of firms) deduction is made on payments exceeding Rs. 30,000 to contractors. This is for construction contracts, advertisement contracts, transport contracts, and other services.
Section 194H – TDS on Commission or Brokerage: 5% TDS is charged if the payment is more than Rs. 15,000. This is for payments to agents, brokers, and intermediaries in different industries.
Section 194I – TDS on Rent: 10% TDS on land/buildings and 2% on machinery/equipment if the rent is more than Rs. 2,40,000 per year. This section makes landlords also share their income in tax revenue.
Section 194J – TDS on Professional or Technical Fees: 10% deduction on payment exceeding Rs. 30,000. This section is applicable for fees to lawyers, doctors, consultants, architects, engineers, and other professionals.
TDS Deduction and Payment Process
The process of deduction of TDS consists of three significant steps:
- Deduction – The tax amount to be deducted from the payer prior to the payment is deducted by the payer.
- Deposit – The deducted TDS must be deposited with the government within the specified period, typically on or before the 7th of the following month. For a payment made in March, it is 30th April.
- Filing of Returns – The deductor has to file quarterly TDS returns:
- Form 24Q for salary payable
- Form 26Q for other payments
- Form 27Q for non-resident payments
The late filing of TDS return is accompanied with a levied penalty of Rs. 200 per day under Section 234E.
Importance of TDS
- Prevents Tax Evasion: By deducting tax at the source, TDS reduces the opportunity for tax evasion and ensures that taxes are paid in a timely fashion.
- Guarantees Consistent Income: It provides the government with a continuous flow of taxation revenue during the whole year to assist in development programs and public welfare.
- This is due to the fact that salaries and services are paid as per some agreed arrangement so that tax payment does not occur as a lump sum at the end of the financial year But progressively in the course of the financial year itself.
- Increases Transparency: Because TDS is withheld at several levels of transactions, the government is able to efficiently track money transactions and follow taxable income.
Landmark Case Laws on TDS
1. Hindustan Coca-Cola Beverages Pvt. Ltd. v. CIT (2007) – The Supreme Court declared that if the income is already taxed by the payee, then the deductor is free from TDS once again. The case laid down the connection between the TDS obligation and the payment of direct taxes.
2. CIT v. Eli Lilly & Co. (2009) – The Supreme Court ruled that employers must withhold TDS on salary payments to expatriate employees resident in India, regardless of the fact that the payment of salary is outside India. This re-affirmed the principle of global income taxation in Indian law.
3. CIT v. Sony Pictures Networks India Pvt. Ltd. (2022) – The Bombay High Court ruled that the payments made for the acquisition of broadcasting rights were not liable to TDS under Section 194J, since they were not technical services.
4. GE India Technology Centre Pvt. Ltd. v. CIT (2010) – The Supreme Court was of the opinion that such payments of amount on account of software licensing could not be made liable to TDS as royalty under Section 195. It cleared the fog from cross-border taxation of software transaction.
5. Transmission Corporation of A.P. Ltd. v. CIT (1999) – The Supreme Court reiterated that TDS is to be deducted even if the deductor doesn’t have any clarity on whether the payment is taxable or not; thus reaffirming the moral duty of a deductor to facilitate a tax payment.
Consequences of Non-Compliance
Non-compliance with TDS requirements can result in penalties, interest and legal action:
- Interest: Interest for non-deduction or delay in payment is charged at 1% per month and 1.5% per month under Section 201(1A) for non-deduction and delay in payment, respectively.
- Penalty: An equal penalty for the unpaid TDS amount can be imposed under Section 271C.
- Prosecution: In extreme cases, imprisonment under Section 276B can be imposed if the deductor does not deposit the TDS.
Recent Amendments and Updates
The government updates TDS provisions on a regular basis to enhance compliance and simplify tax collection. Recent updates include:
- Higher TDS Rates for Non-Filers (Section 206AB): If a person has not filed income tax returns for two preceding assessment years and has TDS deductions of more than Rs. 50,000, then he/she would have to pay higher TDS rates.
- TDS on Cryptocurrency Transactions (Section 194S): A 1% TDS has been imposed on cryptocurrency transactions exceeding Rs. 50,000 (for specified persons) or Rs. 10,000 (for others) to track digital asset transactions.
Conclusion
In India, TDS is required to collect duty timely and enhance compliance. Understanding the TDS provisions is very much important for individuals as well as businesses, failing which there could be penalties and other concerns in managing the country’s taxation system. With several amendments and more of the process being digitized for tax compliance, understanding the updates regarding TDS is of utmost important for every taxpayer.
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