TDS under Income Tax Act: All You Need to Know

TDS under Income Tax Act: All You Need to Know

TDS - Income Tax Act - Taxscan

INTRODUCTION

Tax is a compulsory payment imposed by the government or the authority for the services rendered for the citizens. Income tax is a form of taxation in which the tax is collected on the basis of the income generated from a business. Tax deducted at source (TDS) is one of the modes of collecting tax in India at the very source of income, governed under the Indian tax Act of 1961. TDS is simply an indirect method of collection of the tax that combines the concepts of “pay as you earn” and “collect as it earned”. It is deducted before making payments on specified items such as salary, commission, rent, etc if the total amount exceeds the threshold limit. The deductions are made on the basis of the provisions of the Income-tax 1961 and the First Schedule to the Finance Act 1997.

Section 190- 194O of Chapter XVII of the income tax act 1961 defines the term TDS and its variants. As per section 190: Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter.

It is the deductor’s responsibility to deduct TDS before making the payment and deposit the same with the government, in order to keep the revenue source stable for the govt. TDS must be deposited to the government by the 7th of the subsequent month. TDS helps in the prevention of tax evasion.

The following are the important income that are applicable to Tax;

SECTION 192 of the Income Tax Act

SALARY

Section 192 states that “Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assesse under this head for that financial year”.

Salary means the fixed regular payment made by an employer to the employee for the works performed by the employee. TDS on salary is deducted before the actual payment at rate based on the income slab, since the taxable income of employees differs, different rates are charged as per the income they earned.

TDS on University Employees

In The Income-tax Officer (TDS), Kottayam. Vs Mahatma Gandhi University, Priyadarshini Hills P.O., Kottayam, the Income Tax Appellate Tribunal, held that no TDS will be deducted on salary from the employees working in Universities.

TDS on Salary to Teachers

In the casePrincipal Sri Sathya Sai College for Women Sector 2, Jawahar Nagar,Vs The ITO TDS-2 Jaipurjaipur bench of ITAT ruled that the salary paid to teachers, lecturers, and staff by the college is subject to TDS under Section 192 of the Income Tax Act.

TDS on salary of employees working in abroad in respect of services rendered in India

In the case CIT vs. Eli lilly and company, the divisional bench held that Payment of salary abroad in respect of services rendered in India is liable for TDS Home Salary/ special allowance payment made by the foreign company abroad is for a rendition of services in India, then such payment would come u/s 9(1)(ii) and liable for TDS u/s 192

TDS on salary of an employee when received from more than a employer

In CIT vs. Marubeni India, the divisional bench held that the employer responsible for TDS in relation to the salary received by an employee from another employer if the employee furnishes such particulars

TDS on salary in foreign currency

In CIT vs. Chowgule& Co. Ltd, the divisional bench held that Rule 115 – Telegraphic transfer buying rate has to be adopted by State Bank of India if the salary is in foreign currency.

SECTION 194A of the Income Tax Act

INTEREST OTHER THAN INTEREST ON SECURITIES

It includes the interest like bank deposits, interest on loans and advances, interest on post office deposits, etc. this is only applicable to the residents. Thus the non-residents are exempted from the payments.

The threshold limit is 10,000 in case the TDS payer is a bank or any banking institution, banking co-operative society, and the post office.5,000 in any other case and the TDS rate 10%.

According to Section 194A of the Income Tax Act 1961:

“Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income (by way of interest other than income by way of interest on securities),shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force”.

TDS on crediting interestto the account of ex-employees

In CIT vs. Food Corporation of India Contributing Provident Fund Trust, the divisional bench held that Provident Fund Trust of employees is assessable in the status of “Individual” not liable for TDS while crediting interest amount to the account of ex-employees

TDS on Private Specific Trust

In CIT vs. Sivasakthi Trust, the divisional bench held that “Private Specific Trust representing individual/HUF not liable to deduct tax. Individual is not restricted to the human being or natural person but would cover artificial juridical persons”.


SECTION 194C of the Income Tax Act

PAYMENT TO CONTRACTORS

Contractor means a person who undertakes a contract to perform the specific job. The contract can be between the central and state government, any local authority, any company, any co-operative society. Threshold limit 30,000 for Single Payment and 1,00,000 for Annual Payment.

Section 194C states that “Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to

 (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

TDS on Contractors even in the absence of a contract

In a case Shree Choudhary transport company Vs Income Tax Officer, the Supreme Court held that the individuals must deduct TDS on payments to contractors even in the absence of a contract.

TDS on raw materials from Foreign country

In CIT vs. Nova Nordisk Pharma India Ltd, the court held that the payment is compulsory even if the raw materials supplied from foreign country.

TDS on Freight Charge

In CIT vs. United Rice Law Ltd, the single bench held that where there is no written or oral agreement between assessee and transport for carriage of goods nor it is proved that any freight charges were paid to them in pursuance of a contract, there is no liability to deduct tax at source u/s 194C


SECTION 194D of the Income Tax Act

INSURANCE COMMISSION

It covers payments made by way of any remuneration/reward in the form of commission or otherwise for procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance).

Section 194 D states that “Any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax”

It is advisable to take insurance policy to mitigating the financial crunch caused due to medical emergencies and also for one’s dependant as well. The people choose their insurance through agents or brokers. And there shall be any commission or reward received by such agents, also they are subjected to TDS as dictated under Section 194D of the Income Tax Act. The eligibility is required for payment to the resident person, as remuneration/ rewards, by the way of commission or for the following purposes are Soliciting or obtaining insurance business and Continuance, renewal or revival of policies of insurance. The Tax is deducted at the time of credit of commission in the account of the payee, or the payment in cash or cheque or in kind.

    The rate of TDS as follows:

  • Individuals – 5%
  • Domestic company – 10%

TDS on Insurance Policy

InGeneral Insurance Corporation of India Vs. ACIT (TDS), the Mumbai bench of ITAT related that, The payment is sort of sharing of profit and it, in our view, does not fall within the ambit of remuneration or reward for soliciting or procuring insurance business. Remuneration or reward should be paid to the solicitor or procurer of insurance business. In the present case, solicitor or procurer is the payer and not the payee. Therefore, section 194D has no application.

SECTION 194G of the Income Tax Act

COMMISSION, ON SALE OF LOTERY TICKETS

The Income Tax Act, 1961 section 194G relating to TDS commission on purchase or distribution or sale or any other activities related to the Lottery tickets. The applicable TDS rate required dedutor to deduct the TDS at 5% and also the deductor is mandatorily deduct the TDS within the time of payment in cash /cheque/draft /any other mode or the time of credit of income to the account of the payee.

194G states that  “Any person who is responsible for paying, on or after the 1st day of October, 1991 to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount exceeding fifteen thousand rupees shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent”

TDS on lottery tickets

In The Assistant Commissioner of Income-tax Vs Smt. Biji Suresh of Cochin bench of ITAT related that the assessee is not giving any commission to the sub agents as there is a sale being effected between the assessee and the sub agents and the assessee after transferring the lottery tickets to the sub agents has no control over the same.

SECTION 194H of the Income Tax Act

BROKERAGE COMMISSION

An individual or the member of Hindu Undivided Family making payment for commission and brokerage to the residents is required to deduct TDS at the time of payment.

Section 194H states that “any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed fifteen thousand rupees”.

TDS on non-resident agent

In a case, ACIT, Circle-1, Agra. Vs Vs..M/s Manufax (India) S.B.Compound Kailash Road,Agra. PANNo.AAGFM8875K, Agra Bench ITAT related that the assessee is not liable to deduct tax at source (TDS) when the non-resident agent provides services outside India on payment of commission. As per the CIT(A), section 195 of the Act, clearly speaks that unless the income is liable to be taxed in India, there is no obligation to deduct tax and in order to determine whether the income could be deemed to be accrued or arisen in India, section 9 of the Act is the basis.

TDS on Discount

In the case ofCIT v Director, Prasar Bharati, it was held that Payment made by Doordarshan to advertisement agencies in the form of discount held as commission.


SECTION 194I of the Income Tax Act

PAYMENT OF RENT

The payment of rent can be any mode as lease, sub-lease, tenancy or any other agreement, also arrange the separately or together any land, building, machinery, equipment, furniture etc. It includesThe rent for plant, equipment, machinery, land/ building/ furniture/ fittings.

 Section 194-I states that “Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

(a) two per cent for the use of any machinery or plant or equipment; and

(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings”.

TDS on accommodation on regular basis

In a case, Dadiba kali Pundole Esplanade House Vs the Asst Commissioner ofIncome Tax, Ward 17(1) , the Mumbai bench ITAT related that the

provision of section 194(I) is applicable where the accommodation is taken on regular basis.

TDS on Franchisee Agreement

In the case of,CIT v NIIT Limited,the court held that the assessee providing computer education and training under franchisee agreement under which fees collected from students by assessee and shared with Franchisee. Same is not a payment of rent and hence no TDS

SECTION 194J of the Income Tax Act

FEES FOR PROFESSIONAL OR TECHNICAL SERVICES

Professionals or technicians are those persons qualified and experienced in a specific profession. Fees are paid in consideration for any technical managerial services rendered.

Section 194J states that “Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services, or

(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or

(c) royalty, or

(d) any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 55[two percent of such sum in case of fees for technical services (not being a professional service) or royalty where such royalty is in the nature of consideration for the sale, distribution or exhibition of cinematographic films and ten percent of such sum in other cases,] as income-tax”.

TDS on Professional Service

In a case,M/s. Sundaram Business Services Limited Vs. The Income Tax Officer, Chennai ITAT ruled that Assessee is not liable to deduct tax at source under Sec.195 of the IT Act, when payment is made to offshore entity for rendering independent professional service.

TDS on absence of employer /employee

In CIT vs. Coastal Power Co, the divisional bench held that payment to temporary consultants in the absence of employer / employee relationship would be covered u/s 194J.

TDS on mobile Telephone providers

In Skycell Communications Ltd. vs. Dy. CIT, the single bench held that payment to cellular mobile telephone service providers not covered under section 194J

TDS on surrogacy

In a case, Kiran Infertility Central Private limited Vs Income Tax Officer, Ward-2(1), Hyderabad

Hyderabad bench ITAT ruled that uled that no TDS applicable on Surrogacy payments. The Tribunal while relying on various case laws  M/s.GE India Technology Centre P. Ltd. Vs. CIT; CIT Vs. Faizan Shoes Pvt. Ltd; and DCIT Vs. Welspun Corporation Ltd. held that  Surrogacy payments are not taxable in India so as to be held liable for TDS deduction.

SECTION 194O of the Income Tax Act

E- COMMERCE

It includes Payment of certain sums by e-commerce operator to e-commerce participant.

Section 194O states that “Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter, where the sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator shall, at the time of credit of the amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier, deduct income-tax at the rate of one percent of the gross amount of such sales or services or both”.

TDS on E-Commerce

In a case, EPRSS Prepaid Recharge Services India Pvt. Ltd., , vs. ITO, Pune bench ITAT held that payment of web hosting charges to Amazon for using its servers for providing e-services not taxable as royalty and therefore, no TDS is required to be deducted from the same

CONCLUSION

Tax Deducted on Source provisions may be a very vital part of the tax law in India. It acts as a daily source of income for the government. It might also act as a reporting mechanism for payments earned by various people, thereby making the tax administration more straightforward. All employers must deduct tax at source or TDS from their employees’ salary and deposit the TDS with the tax department through their Tax Account Number (TAN). If a person makes default within the payment or deduction of TDS he shall be responsible for the penalty. As per Section 276 B of tax Act, if an individual fails to deposit the TDS, he shall be punished with rigorous imprisonment for a term up to 3 months, which can reach seven years, and with a fine. Further, the consequence of not complying with its rigorous, and every one those that are cast with the responsibility for deduction and remittance cannot ignore an equivalent. Hence, a correct control mechanism is made by each business entity to make sure that the TDS provisions are suitably complied with.

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