TDS: Tedious provisions

Far from recognising the efforts of TDS deductors, the tax man penalises them for even petty defaults
THE GOVERNMENT'S efforts to improve tax collections through tax deduction at source (TDS) are increasing by the day, and the scope for TDS expanding by the year. There’s good reason for that: TDS is the best medium of collecting tax without much of a hassle, since the responsibility to deduct tax is not on the government, but on citizen-payers. What’s more, the government doesn’t even have to pay any remuneration to these ‘involuntary volunteers’ who deduct tax at source. It is, therefore, not surprising that the tax department accords a lot of importance to TDS as a source of generating revenue and to administering the TDS provisions more vigorously.
Casting a wider net. In 2001, brokerage and commission payments were brought within the TDS net; in 2002, it was the turn of dividend distributions. However, an individual or a Hindu Undivided Family (HUF) was always spared the obligation to deduct tax while making payments in most cases. This exemption was based on the well-established principles that people with little or no infrastructure shouldn’t be called upon to undertake government work.
However, with effect from 1 June 2002, specified individuals and HUFs have been saddled with the responsibility of deducting and depositing tax on payments made by them. These specified individuals and HUFs are those whose total sales, gross receipts or turnover from business exceed Rs 40 lakh or, where they are in profession, their gross receipts exceed Rs 10 lakh as specified under Section 44AB during the financial year immediately preceding the financial year in which the sums of money liable for TDS are credited or paid.
In other words, individuals and HUFs who were liable to get their books of accounts audited under Section 44AB (Tax Audit) for the year ended 31 March 2002 will also, with effect from 1 June 2002, be liable to deduct and pay tax to the government under the various TDS provisions.
TDS Provisions
The provisions under which specified individuals and HUFs are liable to deduct tax at source are:
Section 194A. For interest exceeding Rs 5,000 per person per year at 10.50 per cent.
Section 194H. For commission or brokerage (apart from brokerage on securities) in excess of Rs 2,500 per person per year at 5.25 per cent.
Section 194I. For rent exceeding Rs 1.20 lakh per person per year at 15.75 per cent if the payment is to an individual or an HUF, and at 21 per cent if the payment is to any other person/entity.
Section 194J. For fees for professional or technical services exceeding Rs 20,000 per person per year at 5.25 per cent.
Section 194C. For payments by a contractor to sub-contractors exceeding Rs 20,000 per person per year at 1.05 per cent.
The rates that have been specified are the prescribed rates of income tax for TDS and include surcharge at the rate of 5 per cent. In addition, the specified individuals and HUFs are obligated to deduct tax under Section 192 in respect of salaries paid to employees and payments to Non-residents under Section 195. Importantly, the specified individuals and HUFs are liable in the case of payments to sub-contractors only where they are contractors themselves.
TDS Obligations
TAN number. Every person who is liable to deduct tax at source (deductors) will have to get a TAN Number by making an application using Form 49B within the prescribed time, failing which there is a penalty.
Tax deduction. The deductor has to deduct tax at source in accordance with the specified provisions at the prescribed rates at the time of credit of the sums of money liable for deduction or at the time of payment of these sums, whichever is earlier
Tax payment. The deductor has to pay the tax that has been deducted during a month by the 7th of the following month. Failure to pay TDS by the due date will attract interest at 1.25 per cent per month for the period of delay.
Issue of TDS certificate. The deductor has to issue a TDS certificate using Form 16/16A by the end of the following month in which the tax is deducted, and where the payment is credited to the account of the payee at the end of the year, within seven days of two months from the end of the year. A consolidated yearly TDS certificate can be issued only if the payee so requests within one month from the end of the year. Failure to issue the TDS certificate within the prescribed time attracts a penalty of at least Rs 100 per day for the period of the delay; the maximum penalty being subject to the amount of the tax deducted at source. If the deductor has the payee’s Permanent Account Number (PAN), this must be mentioned on the TDS Certificate, failing which there is a penalty of Rs 10,000.
Filing TDS Returns annually. The deductor has to file TDS Returns by June 30 every year, failing which there is a penalty of Rs 100 per return per day. The penalty cannot, however, exceed the sum total of tax deducted. Form 26A must be used for interest (under Section 194A); Form 26I for commission or brokerage (Section 194H); Form 26J for rent (Section 194I); Form 26K for professional or technical fees (Section 194J); Form 26C for payments to sub-contractors (Section 194C). The annual return of TDS on salaries is to be filed by May 30 every year using Form 24.
Taxpayer’s Privilege
A person whose income/receipts are subject to TDS can apply to the TDS Officer and get a certificate for lower deduction of tax at source in case of salaries, interest on securities, dividend, interest other than ‘interest on securities’, insurance commission, commission or brokerage, rent, income from units, payment of compensation on acquisition of a capital asset, and payments to non-residents. The application has to be made in the prescribed form in response to which the ‘Certificate of lower TDS’ will be issued by the TDS Officer.
Bottomline. Unfortunately, although the deductor renders the government a service by collecting tax free of cost, his time and efforts are never recognised by the tax department. Instead, the department levies interest and penalties for defaults of the complicated TDS provisions. It’s high time the department acknowledged the efforts of deductors and reciprocated by interpreting the provisions liberally.
Further, no penalties should be levied for petty and technical defaults. After all, no deductor would want to err on the wrong side of the law and subject himself to the additional liabilities of interest, penalties, punishment and harassment for income that has been earned by another person. The only reason for a default can, therefore, be lack of knowledge or perhaps inadequate infrastructure.