Rationalisation of Provisions relating to
Tax Deducted at Source & TDS Provisions
Gautam Nayak
Chartered Accountant
The Finance (No.2) Bill 2009 contains a fairly large number of amendments in relation to the provisions of tax deduction at source (TDS). Not only are changes to rates proposed, but also changes to procedures as well as to some of the provisions relating to applicability of TDS.
Changes in Rates
On the TDS rate front, there are various positive proposals, which will simplify the TDS rates.
Firstly, surcharge would not be applicable on TDS on payments to residents or domestic companies, or to non-corporate non-residents. Surcharge of 2.5% would apply only on TDS on payments to foreign companies exceeding Rs.1 crore. Therefore, though a domestic company having income exceeding Rs.1 crore is subject to surcharge of 10% on income tax, the TDS on payments made to an Indian company would not have to be increased by such surcharge.
Secondly, the education cess of 2% and higher education cess of 1% would apply only in respect of TDS on payments to foreign companies and non-residents, and in respect of TDS on salaries. It would not apply in case of any other payments (other than salaries) to residents or domestic companies.
The combined effect of these two changes is that most payments to residents would now attract a rate of deduction which would be a round percentage, not running into a few decimals, as has been the case till now.
From what date are these two amendments applicable? Being part of the Finance (No.2) Bill, these two provisions come into force on enactment of the Finance (No.2) Bill (i.e. date of Presidential assent). However, by virtue of the provisions of s.294, the benefit of these reduced rates would have immediate effect, pending enactment of the Finance (No.2) Bill.
There has been an effort by the Government to reduce the number of rates of TDS, and rationalise them so as to have standard rates. This is a welcome move, as it would reduce the uncertainty as to the appropriate rate for tax deduction - whether a particular payment was covered under one section or the other, where each section had different rates.
From that perspective, the rates of TDS u/s.194-I for rent are being reduced – that for use of machinery or plant or equipment has been reduced to 2% from 10%, while the rate for use of land or buildings or furniture or fittings has been reduced to 10%, from 15/20%. The difference in rates for payments to individuals/HUFs and payments to others is being done away with, with standard rates applicable to all categories of payees.
The rates of TDS u/s.194C have also been rationalised, with the concept of different provisions and rates for contracts and sub-contracts being done away with. However, surprisingly the concept of two different rates for two different classes of payees has been introduced - 1% for payees who are individuals/HUFs, and 2% for others. The differential rate of 1% for advertising contracts has been done away with, and the rate would now depend upon the status of the payee.
No TDS is required to be deducted from a contractor from payments/credits made during the course of business of plying, hiring or leasing goods carriages, if he furnishes his Permanent Account Number (PAN) to the payer. Therefore, payments to a goods transporter by any person, and payments to a truck owner by a goods transport agency would not attract TDS where the payee furnishes his PAN. However, these PAN details would have to be intimated to the Income Tax Department by the payer in the prescribed format.
The changes in rates under both s.194C as well as s.194-I are applicable from 1st October 2009.
There have been some more changes made to TDS rates through Part II of the First Schedule to the Finance (No.2) Bill. The rate of TDS on “Any Other Income” payable to persons other than a company has been reduced from 20% to 10% (effectively applicable to deemed dividend). The rate of TDS applicable on payment of interest to companies has been reduced from 20% to 10%, and on “Any Other Income” payable to companies also from 20% to 10%. These amended rates too come into force on enactment of the Finance (No.2) Bill.
The provision requiring a higher rate of TDS, where PAN is not furnished by the payee or is incorrect, is discussed separately later on in this article.
Amendments to s.194C – TDS on Payments to Contractors
Besides the change in rates of TDS and the combining of the provisions relating to contracts and sub-contracts, a few other changes are also being made to the provisions of section 194C with effect from 1.10.2009.
The controversy, as to whether supply of goods which have been subjected to processing at the specific requirement of the customer amounts to ‘work’ for the purposes of TDS under this section, is now being sought to be settled by an amendment. This controversy had arisen in relation to supply of printed packaging material, manufacture of goods on a contract basis, etc. Various High Courts and Tribunals, including the Bombay High Court in the case of BDA Ltd. 281 ITR 99, had taken the view that the substance of the transaction had to be seen to determine whether a particular contract amounts to a contract for supply of goods or a contract for work. In these decisions, the courts had consistently held that cases where the property in goods passes on delivery of the finished product, amounted to contracts for sale of goods and not for 'work'.
The definition of 'work' is now being expanded to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. Such manufacture or supply according to the requirement or specification of a customer by using material purchased from a third-party is specifically excluded from the definition.
In most cases, even where the material has been supplied by the customer, some materials may be purchased from third parties and used in the manufacture of the goods. The definition does not specify as to what percentage of material needs to be supplied by the customer or what percentage purchased from third parties in order to fall within the definition or outside the definition. For instance, a customer may supply cloth for stitching of shirts and trousers to the contractor. However, the contractor may purchase buttons, zips, thread, etc for such manufacture from third parties. In this case, would such manufacture amount to ‘work’? In such cases, the substance of the transaction would have to be seen. If the majority in value of the raw material required for manufacture is supplied by the customer, then the contract would fall within the definition of 'work'. However, if only a small portion in value of the raw material required for the manufacture is supplied by the customer, then the manufacture or supply would not amount to 'work'.
This amended definition of 'work' means that certain transactions in respect of which TDS is currently being deducted at source would no longer be subject to such deduction. For instance, in most cases of supply of printed stationery or printed packing material, the raw material (paper and ink) is rarely supplied by the customer, but is purchased by the printer from his own sources. Such contracts would now no longer be subject to TDS.
However, even contracts for supply of goods, not just for manufacture, using material provided by the customer, would now be squarely covered by the provisions of section 194C.
For the purposes of this section, the amended definition of 'manufacture' in section 2(29BA) would apply.
Sub-section (3) of section 194 C provides that in case of such contracts, if the value of the material is mentioned separately in the invoice, tax would be deductible on the invoice value excluding the value of the material. However, where the value of the material is not mentioned separately in the invoice, tax would be deductible on the entire value of the invoice. The logic behind this provision does not seem to be clear. In cases where the material is supplied by the customer, the customer does not raise any invoice on the contractor, and the contractor raises his invoice on the customer merely for his processing charges. The question of inclusion of value of the material in the invoice does not arise at all in such cases. Contracts, where the contractor’s invoice includes the value of the material, are generally cases where the material has been purchased by the contractor from third parties. These cases would fall within the exception to the definition of 'work', and therefore no TDS is deductible at all in such cases.
Processing of TDS Statements – s.200A
A specific provision is being inserted for electronic processing of TDS statements with effect from 1st April, 2010. Such processing would be on the same basis as that of income tax returns. During such computerised processing, arithmetical errors in the statement or incorrect claims apparent from any information in the statement, would be rectified and after such adjustments, tax and interest would be calculated, and the net amount due by or due to the tax deductor would be determined. An intimation showing such amount due by or due to the tax deductor would be sent to him within one year from the end of the financial year in which the statement was filed.
The CBDT has been authorised to frame a scheme for centralised processing of statements of TDS. One only hopes that this does not require all TDS statements to be sent to Bangalore by ordinary post in separate envelopes, as currently required for Form ITR-V in the case of income tax returns!
The best part of the amendment is that if any refund is found due on the basis of such processing, such refund would also be granted to the tax deductor. Today, though there are CBDT circulars stating that any excess payment of tax deducted should be refunded to the deductor, getting such refund is an almost impossible task.
The term “incorrect claim apparent from any information in the statement” has been defined to mean a claim of an item which is inconsistent with another entry or some other item in the statement, or a rate which is not in accordance with the provisions of the Act.
There is no express provision for any appeal against a demand raised through such intimation. However, an appeal may lie to the Commissioner (Appeals) against such intimation under section 246A(1)(a), as an order against the assessee where the assessee denies his liability to be assessed. Unfortunately, for the purposes of rectification, section 154(1) has also not been amended to include an intimation under section 200A, in addition to an intimation under section 143(1).
Time limit for orders u/s.201
Under section 201, a person required to deduct TDS, who does not deduct or after deducting fails to pay the TDS, is deemed to be an assessee in default in respect of such tax. Interest under section 201 (1A) is leviable in such cases. An order is required to be passed for this purpose. Since no time limits were earlier prescribed for passing orders under this section, Tribunals had taken the view that a time period of four years from the date of deduction was a reasonable time limit for passing of an order under this section. Recently, the Special Bench of the Tribunal at Mumbai, in the case of Mahindra & Mahindra Ltd. 313 ITR (AT) 263, held that the time limits for reassessment of four years and six years would apply to such orders.
Time limits are now being prescribed with effect from 1st April, 2010 under this section of two years from the end of the year in which the statement is filed, and if no statement is filed, four years from the end of the financial year in which the payment was made or credit given. For financial years up to 31st March 2008, a one-time time limit up to 31st March 2011 is being provided. This could result in passing of orders under section 201 even in cases where the time limits as laid down by the Tribunal have expired. In such cases, can it be argued that there has to be a reasonable time limit, and not an open-ended blanket permission for the entire past? It is possible that such provision may also be read down by the Tribunals and the courts to provide that only cases falling within a reasonable period prior to the amendment would be affected.
The section refers only to cases of failure to deduct tax from a person resident in India, where the statement is filed or where payment is made or credit is given. The Explanatory Memorandum states that no time limits have been prescribed for order under section 201(1) where:
(a) the deductor has deducted but not deposited TDS, as this would be a case of defalcation of government dues,
(b) the employer has failed to pay the tax wholly or partly under section 192(1A) as the employee would not have pay tax on such perquisites,
(c) the deductor is a non-resident as it may not be administratively possible to recover the tax from the non-resident.
In such cases, it may be possible to argue that the limits as laid down by the Special bench of the Tribunal in Mahindra & Mahindra’s case would apply.
Higher Rate of TDS for Non-Quoting of PAN – s.206AA
Considering the problems being currently faced in giving credit under the Tax Information Network for taxes deducted at source to all to all persons from tax has been deducted at source, a new section 206AA is being inserted from 1st April, 2010 to provide that every person entitled to receive an amount on which tax is deductible (deductee) is required to furnish his PAN to the payer. In case such PAN is not furnished or is incorrect, then tax is required to be deducted at the higher of the following rates:
(i) the rate specified in the relevant provision of the Act,
(ii) the rate or rates in force, or
(iii) 20%.
The term 'rate or rates in force' is defined in section 2(37A)(iii) for the purposes of TDS under section 195 as the rate specified in this behalf in the Finance Act of the relevant year or the rate specified in the relevant Double Taxation Avoidance Agreement (DTAA). Since this provision also applies to a non-resident, the question which arises is that if a DTAA provides a lower rate of tax, would this higher rate of 20% apply?
Under section 90(2), in cases where a DTAA applies, the provisions of the Income Tax Act apply to the extent they are more beneficial to the assessee. Therefore, it appears that the rates prescribed under the DTAA, being lower, would prevail over the provisions of section 206AA, and the higher rate of 20% cannot be applied in such cases.
The declarations under section 197A (Form Nos.15G, 15H, etc) would also be invalid unless the PAN is furnished therein, and tax would have to be deducted at such higher rate. Besides, certificate would not be granted under section 197 unless the application contains the PAN of the applicant.
The deductee is required to furnish his PAN to the deductor, and both are required to indicate the PAN in all the correspondence, bills, vouchers and other documents which are sent to each other. This provision seems to carry the requirement to such an extreme, that assessees may even contemplate adding their permanent account number as a part of their letterheads to avoid falling foul of this requirement! Even that may not be enough, as all vouchers would also have to bear this!
Further, today there is no mechanism for verification by the deductor as to whether the PAN of the payee is correct or not. Such mechanism will have to be provided by the Income Tax Department for this purpose, or otherwise it will be impossible for the deductor to comply with this section where an incorrect PAN has been furnished.
Further, this provision will not resolve the problem of giving credit for all TDS deducted. Even if the payee provides the correct PAN, if the payer does not mention the correct PAN or makes a mistake therein or does not file his TDS statements or does not pay the TDS deducted, the deductee would still not get credit of the TDS. This is most unfair, and can only be rectified by either providing the deductee with the power to claim credit by showing proof of deduction by the deductor, or by proper enforcement of the existing tax provisions by the tax authorities in cases where it is brought to their notice that tax has been deducted at source but not paid or statements not filed.
Given the number of duplicate PANs, the problem faced with obtaining PAN speedily, the errors made while processing PAN applications, and other associated problems, one wishes that provisions had been made in this budget for compensating taxpayers for time wasted in trying to get their PAN details corrected or in cancelling duplicate PANs allotted by the tax authorities unilaterally! I am sure that a large number of assessees would benefit by such a provision!
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