BASICS OF TDS UNDER INCOME TAX LAWSSUSHIL VERMA

Indirect Tax Strategist

Growth Knowledge Solutions

Importance of tds for Govt.TDS accounted for 43% of the total revenue of Direct Taxes. The Department is totally computerized and all the information is available with them. Therefore, absolutely essential that all the stakeholders understand their obligations and ensure that at their respective end, accuracy is maintained in feeding the relevant data in the system. It is the responsible of the deductor to ensure accuracy and completeness of data relating to PAN/TAN and filing of returns in a stipulated time which enables the deductee to claim the credit.

Important points relating to TDS

• What is the nature of payment being made?

• Is it covered by any of the TDS sections?

• On what amount is it to be deducted?

• What is the rate of TDS?

• When is it to be deducted?

• When is to be paid to the Govt.?

• Which challan is to be used for payment?

• Which TDS statement is to be filed?

• When is it to be filed?

• Which form of TDS certificate to be issued?

• When is it to be issued?

Section 192 - TDS on salaries

• Payment should be in the nature of salary

• The employer has to deduct tax from the salary that he pays

• At what rate to deduct? - TDS at average rate of tax on the estimated

income of the employee under the head “Salaries”

• When to deduct? - TDS is attracted on payment basis.

• When to pay the TDS to the Govt.? – Within 7 days from the end of the

month in which tax is deducted

Income under Other Heads

• Employee not under an obligation to furnish details of income under other

heads

• If he furnishes the details of income and TDS thereon, the employer is

under an obligation to take them into account.

• There is no prescribed form for this.

• Loss under any head, except house property, cannot be taken into account

• Particulars of other income and TDS on the same, except under House

property, cannot reduce the amount of tax which was otherwise deductible

Other Issues• The annual circular is issued by the CBDT every year guides employers on how to compute the taxable salary

and the tax

• Short or excess deduction can be adjusted from subsequent salaries within the same year. • CIT vs Marubeni P. Ltd [294 ITR 157]

• A.P State electricity board [20 ITD 318] (Hyd)

• Vinsons [89 ITD 267](Mum)

• Donation made by employee u/s 80G

• Annual Circular on salary

• Proof for allowance u/s 10(14) and deduction under chapter VI

• Larsen and Tubro [221CTR 620]

• Retainership fees – Salary Vs Professional fees.

Disallowance u/s 40a(iii)

Salaries payable in foreign currency

• Conversion into Indian currency at Telegraphic Transfer (TT) buying rate on

the date on which tax is required to be deducted – Rule 26

• While calculating income under the head salary, the TT buying rate as on

the last day of the month immediately preceding the month in which salary

is due or paid – Rule 115

• Provison to Explanation 2 to Rule 115(1)

Section 194C – Payments to contractors and sub-contractors

• Applicable to Individuals and HUF only if they are liable for tax audit during the preceding financial year

• What is covered? - Payment made for carrying out any work including supply of labour for carrying out any work, in pursuance to a contract

• Written as well as Oral contracts are covered

• No TDS if payment is made by an Individual/HUF for personal purposes.

• Tax to be deducted on advance payment against the contract

Monetary Limit and Rates• Single payment exceeds Rs. 20,000, or

• Aggregate payments during the financial year exceed or are likely to exceed Rs. 50,000

• At what rate to deduct? - • Payment to Individual and HUF: 1%• Other than Individual and HUF : 2%• No Difference between contractor and sub-contractor

• Payments to Transport Contractors – No TDS on furnishing PAN.

• Otherwise, TDS as per the above rates. w.e.f 01/04/2010 - @20%

• Person responsible for making payment to transporter to furnish prescribed information.

What is ‘Work’?Work includes:

• Advertising

• Broadcasting and telecasting including production of programmes for broadcasting and telecasting

• Carriage of goods and passengers by any mode other than railways

• Catering

• Manufacturing a product according to specification of customer by using material purchased from customer

• Work includes but is not limited to a Works Contract

• The word ‘any’ preceding the word ‘work’ indicates that each and every type of work is covered

Birla Cement Works v. CBDT [248 ITR 216](SC)

Contract for work v Works contract

• The term ‘Works contract’ has a separate meaning under tax laws and cannot be equated with the term ‘work’

• Contract for work is a broader term than Works Contract• Associated Cements Co. Ltd. [201 ITR 435](SC)• All Gujarat Federation of Tax Consultants [214 ITR 276](Guj)

• For instance, transport contract and service contracts are contracts for carrying out work but are not works contracts

Reimbursement of expenses• The term ‘Any Sum’ refers to the Gross Amount paid under the

contract. Hence, reimbursement of expenses would also attract TDS

• Reimbursement of actual expenses cannot be deducted out of the bill amount for the purpose of tax deduction at source

• CBDT’s Circular No. 715

• The percentage deduction prescribed in law is with reference to the amount of payment and not income comprised in the payment

• Associated Cement Co. Ltd. v. CIT [201 ITR 435]

Service tax

• Since section 194C refers to any sum paid, TDS will be attracted on the service tax portion also

• Circular No. 4/2008 states that TDS should not be made on service tax element of rent. Since the circular specifically mentions rent, it cannot be applied for the purpose of section 194C

Advertising contracts• A person makes payment to an advertisement agency. The agency

makes payments to its artists and the media. What are the TDS implications?

Payment to agency – 1% / 2% u/s 194CPayment to artists – Section 194JPayment by agency to media (Print/Electronic) – No TDSPayment directly to media – TDS applicable u/s 194C(Q. no. 1,

2 & 3 of Circular 715)

• Payment to Doordarshan is not liable to TDS as it is a government agency

• Q. no. 4 of Circular No. 715

• Payment made for production of program for the purpose of broadcasting and telecasting - TDS u/s 194C

Advertisement Hoardings• Contract for putting a hoarding is an “Advertisement contract” and is

covered under section 194C

• However, if the space for hoarding is taken on rent and then sub-let, the payment will be covered under section 194I

• Payment made for sponsorship for debate, seminar or other functions held in college, schools etc. is in the nature of carrying out work of advertisement and liable to TDS

• TDS would apply in case of advertisement issued in souvenirs brought out by organizations

Maintenance Contracts and Installation Charges

Normal maintenance contracts which include supply of spares will be covered under section 194C

Where technical services are rendered, section 194J will apply

Whether contract for design, manufacture and supply of Plant and Equipment including erection and installation - liable for TDS?

Payments to travel agents• Whether payment made to airlines or travel agents for

booking of travel tickets attracts TDS under section 194C?

• There is no privity of contract between the passenger and the travel agent.

• Section 194C does not apply

• However, TDS under section 194-I is applicable for chartering of aircraft, ship etc. • CBDT’s Circular No. 715

Payments to Clearing and forwarding agents

• Payments to clearing and forwarding agents attracts TDS under section 194C

• National Panasonic P Ltd [3 SOT 16](Del)

Car Hire charges

• The terms of hire need to be examined

• Section 194C includes payment for carriage of goods and passengers

• Hirer should not have control over the direction of the car

• It should be a time charter – Gosalia Shipping Co case

• Point-to-point service / Pick and drop facility is covered under section

194C

• Controversy now resolved by amendment made by Finance Act

2009

Section 194H – Commission or Brokerage

• Applicable to all payers other than Individuals and HUF.

• Applicable to Individuals and HUF liable to tax audit during the preceding financial year

• What is covered? - TDS on payment of income by way of commission or brokerage

• Insurance commission, brokerage for securities are not covered

• At what rate to deduct? - 10%

Section 194-I - Rent• Applicable to all payers, except Individuals and HUF

• Applicable to Individuals and HUF only if they are liable to tax audit during the preceding financial year

• What is covered? – Income by way of rent

• When to deduct? – At the time of payment or credit whichever is earlier

• Credit to suspense account is deemed to be credit to the account of the payee

• At what rate to deduct? –Machinery, Plant or Equipment - 2%Furniture, Land or Building - In All cases: 10%

• No TDS if the amount paid or likely to be paid during the financial year does not exceed Rs. 1,20,000 in aggregate

What is Rent?

• Any payment, by whatever name called

• Under any lease, sub-lease, tenancy or any other agreement or

arrangement

• For the use ,either separately or together, of any• Land

• Building

• Land appurtenant to a building

• Machinery or Plant

• Equipment, Furniture or Fittings

• Whether or not owned by the payee

Section 194J – Fees for professional or technical services• Applicable to all payers except Individuals and HUF

• Applicable to Individuals and HUF only if they are liable to tax audit during the preceding financial year

• What is covered?• Fees for professional services• Fees for technical services• Royalty• Non-compete fee

• When to deduct? - TDS at the time of payment or credit, whichever is earlier

• Credit to suspense account is deemed to be credit to the account of the payee

• At what rate to deduct? - 10%

Section 194J – Fees for professional or technical services

• No TDS if fees for professional services are paid by an Individual or HUF for personal purposes of the individual or member of the HUF

• No TDS if the payment does not exceed Rs. 20,000 in aggregate during the financial year

Professional servicesServices rendered by a person in the course of carrying on a:

• Legal profession

• Medical profession

• Engineering profession

• Architectural profession

• Accountancy profession

• Technical consultancy profession

• Interior decoration profession

• Profession of Information Technology

• Profession of Company Secretary

• Film artistes

• Sports person, Umpires and Referees, Coaches and trainers, Team Physicians and Physiotherapists, Event Managers, Commentators, Anchors and Sports Columnists (Notification 2085(E) dated 21st August 2008)

Fees for technical services

• Consideration for rendering of• Managerial, technical or consultancy services• Including provision of services of technical or other

personnel

• But does not include consideration for • Construction, Mining or like project, or• Consideration chargeable in the hands of the recipient

under the head ‘Salaries’

Section 194 J

• Since section 194J refers to “any sum paid”, TDS is applicable even on reimbursement of expenses including service tax ( Circular )

• If separate bill is raised for reimbursement of expenses, TDS is not applicable• Dr. Willmar Schwabe India (P) Ltd. [3 SOT 71](Del)

Non-resident making payment to professional in India

• Non-resident making payment of professional fees to any resident CA, lawyers, advocate and solicitor is not required to deduct tax provided:

• Such fees is paid through regular banking channels

• Such non resident does not have any agent, business connection or permanent establishment in India

Section 195 - TDS on payment to non-residents• Section applies to all payers, including individuals and HUF

• Section covers payment made to a non-resident not being a company or a foreign company

• What is covered? – Payment in the nature of interest or any other sum chargeable under the Act

• When to deduct? – TDS at the time of payment or credit, whichever is earlier

• At what rate to deduct? – Rates in force for the section under which the payment falls (for e.g. Section 115A, 111A etc.) or treaty rate whichever is beneficial

An overview of TDS u/s 195Snapshot of the Section

• Sec. 195(1) – Scope & conditions for applicability

• Sec. 195(2) – Application by payer to A.O. for lower deduction of tax

• Sec. 195(3 & 4) – Application by payee to A.O. for lower deduction of tax

• Sec. 195(5) – Powers to CBDT to make Rules

• Sec. 195(6) – Payer to furnish information in prescribed form

Scope of Income of a Non-Resident

Certain Cross Border Payments – Withholding Tax Issue • Business Income (of NR)…

• Off-shore Supply : 288 ITR 408

• If title to goods passed outside India and payments outside India not taxable• Signing in India is not relevant• Performing of certain activities in India (loading, unloading, inland transportation)

not relevant

• Payment to foreign agents

• Operations outside India (CBDT circulars 23 and 786)• Not taxable in India – (125 ITR 525), (267 ITR 725)

• Contrary view taken by AAR in case of Wallace Pharma [278 ITR 97] and Rajiv Malhotra [285 ITR 564](AAR)

Section 193 - TDS on Interest on securities

• “Interest on Securities” as per section 2(28B) means

(i) interest on any security of Central Government or State Government;

(ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act

Rule 30 – Time and Mode of Payment

TDS basics under IT Laws.

Without Challan – Same Day

With Challan – on or before seven days from the end of the

month in which the deduction is made.

Deductors - Others

SPECIAL PERMISSION

• Prior approval of the Joint Commissioner• Permit quarterly payment• Salary - under section 192• Interest - under section 194A• Insurance Commission - under section 194D• Commission or Brokerage - under section 194H

Due Dates…Quarter ending…Quarter ended Due date

30th June 7th July

30th September 7th October

31st December 7th January

31st March 30th April

E – Payment

• a company and

• a person (other than a company) to whom the provisions of Sec 44AB are

applicable

Deductor – Government without challan remittance

• Submit statement in Form No. 24G within 10 days from the end of the month to the Agency authorized by the Director General of Income Tax (Systems)

• Intimate the BIN generated by the agency to each of the deductors

CERTIFICATE

• Form No. 16 – Salary

• Form No. 16A – other than Salary

• Specify

Valid PAN of the Deductee

Valid TAN of the Deductor

BIN-CIN

Receipt number of the relevant Quarterly Statement

Time Specified

Form No. Periodicity Due Date16 Annual By 31st day of May

16A Quarterly Within 15 days from the duedate

Quarterly Returns

Statement of Deduction of Tax

• Form No. 24Q - Salary

• Form No. 26Q - All other deductees

• Form No. 27Q - Deductees – Non-Resident

Time ScheduleDate of ending of the Due Date

Quarter of the F.Y

30th June 15th July

30th September 15th October

31st December 15th January

31st March 15th May

Furnishing the statement electronically

• the deductor is an office of the Government or

• the deductor is the Principal Officer of a Company or

• the deductor is a person who is required to get his accounts audited u / s

44AB in the immediately preceding Financial Year or

• the number of deductee’s records in the statement for any quarter of the

Financial Year are twenty or more

ANNUAL TAX STATEMENT

• Form No. 26AS

• Section 203AA

• Rule 37AB

• Statement issued on behalf of Income Tax Department

• Details of tax indicated based on the data submitted by the deductor

• Due date for sending this statement is July 31st of every year

Form 26AS consists of:

General Information

• Part A : Details of TDS

• Part B : Details of TCS

• Part C : Details of Tax paid (other than TDS/ TCS)

• Details of Refund granted

Obligations……

Obligations of a person responsible for deduction/collection of tax :

• Obtain TAN

• Identity the nature of payment

• Deduct tax at prescribed rate

• Remit in Govt. A/c in due time

• File TDS statements on due date

• Issue TDS Certificates in time

Nature of payment - understand2. Identifying nature of payment and deduction of tax

thereon:

Depending on the nature of payment to be made by the drawing and disbursing officers/deductor, there are various rates of tax to be deducted which are shown in the chart at the next para. Payment by the DDOs under some important heads of income are also discussed, in brief, later.

When do we deduct TDS?3. When to deduct or collect tax and at what rate :

Tax is required to be deducted on specified sum under different heads at the time of –

Actual cash payment or receipt Issue or receipt of cheque/draft Credit or debit to the account of the payee or payer Even if the amount is credited to suspense account or any other account, TDS to be made

whichever is earlier as per different provisions of Income Tax Law and as per rates prescribed in the Income Tax Act as shown in the chart given in next page.

5 (a) Issue of TDS Certificates:

The deductors must issue TDS certificates to the deductees in the formed prescribed in Income Tax Rules. Different forms of certificates of deduction or collection of Tax i.e. TDS & TCS together with their due dates of issue are is tabled below :-

Description Form No.

Periodicity Due Date

Deduction of tax from salary

16 Annual By 31st May of the next financial year in which deduction is made

Deduction of tax from other than salary

16A Quarterly Within 15 days from the due date of furnishing the TDS stateement.

TCS 27D Quarterly Within 15 days from the due date of furnishing the TCS statement.

Tax deducted on or after 1.4.2012, it is mandatory for all type of deductors to issue quarterly form 16A (non salary tds certificate) only after downloaded the same from the TIN-NSDL website

6. Furnishing of TDS and TCS quarterly Statements :

Sec 200(3) of the I.T. Act provides that every deductor has to furnish quarterly statements within the prescribed time, and in the prescribed form as tabulated below :-

6.1 Prescribed forms :

Nature of Deduction/Collection Form Number

TDS from Salary 24Q

TDS from payments other than salary 26Q

TDS from payments other than salary made to non residents

27Q

Statements of non deduction of TDS by Banking Companies

27QAA

TCS 27EQ

6.2 Due dates of filling quarterly returns

Quarters ending on

Due dates for TDS return form No. 24Q, 26Q and 27Q)

Due dates for TCS return (form No. 27EQ)

Due dates for Filling 27QAA

For Govt. Deductor

For other Deductor

For Govt. Deductor

For other Deductor

30th June 31st July 15th July 31st July 15th July 31st July

30th Sept. 31st Oct. 15th Oct. 31st Oct. 15th Oct. 31st Oct.

31st Dec. 31st Jan. 15th Jan. 31st Jan. 15th Jan. 31st Jan.

31st March 15th May 15th May 15th May 15th May 30th June

NOTE 1. Electronic filling of quarterly TDS/TCS statements is compulsory if the deductor is an office of the government.

Defaults in TDS/TCS :1. Failure to deduct the whole or part of the tax at source (Non-deduction, short deduction or

delay in deduction)

2. Failure to deposit whole or part of the Tax deducted at source (non-deposit, short deposit or

late deposit)

3. Failure to apply for TAN within prescribed time limit or failure to quote TAN on allotment as

required u/s 203A

4. Failure to furnish in due time TDS returns as required u/s 206 or to furnish TDS certificates as

required u/s 203 or to deliver or cause to be delivered a coy of the declaration as required u/s

197A or to furnish a statement in form No. 12B as required u/s 192(2C)

5. Failure to mention the PAN of the deductee in all quarterly statements delivered in accordance

with the provision of Section 200 as well as in all certificates furnished in accordance with the

provisions of section 203.

Consequences of defaults:

1. Treating Tax Deductor to be an assessee in default (Sec 201(11)

2. Charging of penal interest under Sec 201(1A)

3. Levying of penalty u/s 221, 271C, 272A(2) & 272BB

4. Launching of prosecution u/s 276B & 277

5. Creating a charge on the assets of the defaulter u/s 201(2)

6. Disallowance of specified expenditure to the assessee u/s 40(a)(ia)

These are summarized in the tables as follows :-

CONSEQUENCE OF DEFAULT/FAILURE

FAILURE TO DEDUCT TAX AT SOURCE FAILURE TO DEPOSIT THE TAX DEDUCTED AT SOURCE

Assessee deemed to be in default

Under Section

Assessee deemed to be in default

under Section

20(11) 207 (1A)

271C 221 201(1) 201(1)A

221 276B

Tax demand

Interest

Penalty Penalty Tax demand

Interest

Penalty Prosecution

Amount of tax deductible but not deducted

1% p.m. on the amount of tax deductible

Amount of tax deductible but not deducted

Max. upto the amount of tax in arrear

Amount of tax not deposited

1.5% p.m. on the amount of tax not deposited

Max. upto the amount of tax in arrear

Rigorous imprisonment min. of 3 months and Max. of seven years and also within fine.

CONSEQUENCE OF DEFAULT/FAILURE

Failure to apply for TAN

Failure to furnish prescribed statement

Failure to deliver copy of decalration

Failure to issue TDS certificates

Failure to furnish statement of perquisite or profit in lieu of salary

Failure to mention PAN of deductee in TDS statement and Certificate

u/s 203A u/s 200(3) u/s 197A u/s 203 u/s 192(2C)

A sum of Rs. 10,000/- u/s 272BB

Rs. 100/- for every day during which failure continues u/s 272A(2)(k) Not applicable on statement to be filed w.e.f. 1.7.2012

Rs. 100/- for every day during which failure continues u/s 272A(2) (t)

Rs. 100/- for every day during which failure continues

u/s 272A(2) (g)

Rs. 100/- for every day during which failure continues u/s 272A(2) (i)

A sum of Rs. 10,000/- u/s 272B

Fee for defaults in furnishing statements – Sec. 234E

1. If a deductor fails to submit the e-TDS/e-TCS statement, which is due after 1.7.2012, within the due date, he shall be liable to pay, by way of fee, a sum of two hundred rupees for every day during which the failure continues. However, the amount of fee shall not exceed the amount of tax deductible or collectible.

2. Penalty for failure to furnish quarterly TDS/TCS statements – Sec. 271H

3. If a deductor fails to submit the e-TDS/e-TCs statement, which is due after 1.7.2012, within one year from the due date or furnishes incorrect information he is liable for penalty. The minimum amount is Rs. 10,000/- and it may go upto Rs. 1,00,000/-.

4. This is payable over and above fees payable under section 234E.

S.No. Section of Act Nature of payment in brief Cut off amount Rate %

1.4.2012 1.7.2012 HUF/IND Others

1 192 Salaries Salary income must be more than exemption limit after deductions

Average Rate

2 193 Interest on debentures 2500 5000 10 10

3 194 Deemed dividend - - 10 10

4 194A Interest other than Int. on securities (by bank) 10000 10000 10 10

4A 194A Interest other than Int. on securities (by others) 5000 5000 10 10

5 194B Lottery/Cross word puzzle 10000 10000 30 30

6 194BB Winnings from Horse Race 5000 5000 30 30

7 194(C)1 Contracts 30000 30000 1 2

8 194(C)2 Sub-contracts/Advertisements 30000 30000 1 2

9 194D Insurance Commission 20000 20000 10 10

10 194EE Payments out of deposits under NSS 2500 2500 20 20

11 194F Repurchase of units by MF/UTI 1000 1000 20 20

12 194G Commission on sale of lottery tickets 1000 1000 10 10

13 194H Commission or Brokerage 5000 5000 10 10

S.No. Section of Act Nature of payment in brief Cut off amount Rate %

1.4.2012 1.7.2012 HUF/IND Others

14 194J Rent(Land & bldg.) 180000 180000 10 10

Rent (P & M Equipment, furniture & fittings) 180000 180000 10 10

15 194J Professional/Technical charges/Royalty & Non-compete fees

30000 30000 10 10

16 194J(1)(ba) Any remuneration or commission paid to director of the company (effective from 1 July 2012)

NA NIL 10 10

17 194LA Compensation on acquisition of immovable property

100000 200000 10 10

ThanksSUSHIL VERMA

Obligations…

Nature of payment - understand

When do we deduct TDS?