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The TDS screw gets tightened

T. C. A. Ramanujam

T. C. A. Ramanujam on the pluses and minuses in the revised TDS regime

IT IS almost axiomatic that every year the Finance Bill should talk of widening the tax base and introduce more and more provisions meant to bring the non-filers into the tax net. The TDS (tax deduction at source) provisions are being made more and more rigorous; about 45 per cent of the tax revenues accrue through the TDS route. This year's Budget takes the process further. The law is being tightened to ensure that TDS provisions are not circumvented by splitting up contracts.

Section 194 C(3) of the Income-Tax Act, 1961 provides for TDS on contractual payments exceeding Rs 20,000, but this can be circumvented by splitting up the contract. The amendment now proposes that the tax will be required to be deducted at source where the amount credited or paid to a contractor or sub-contractor exceeds Rs 50,000 in the aggregate during a financial year. This amendment takes effect from October 1, 2004.

Section 40(a)(i) amended

A major amendment to the law relates to the proposed disallowance of payments by way of interest, royalty, fees for technical services or any other sum. The existing law enables disallowance of such payments for transactions with non-residents or foreign companies outside India if tax is not deducted at source. Deductions can be allowed in the computation of income if tax is deducted, or after deduction, paid in any subsequent year in computing the income of the year. As long as TDS is not made, such payment will be disallowed. The radical change in the law is officially explained as follows:

With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of Section 40(a)(i) to payment of interest, commission or brokerage, fees for professional services for technical services to residents, and payments to a resident contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax has not been deducted or after deduction, has not been paid before the expiry of the time prescribed under sub-section(1) of Section 200 and in accordance with the other provisions of Chapter XVII-B.

It is also proposed to provide that where in respect of payment of any sum, tax has been deducted under Chapter XVII-B or paid in any subsequent year, the sum of payment shall be allowed in computing the income of the previous year in which such tax has been paid.

The proposed amendment will take effect from April 1, 2005, and will accordingly apply in relation to the assessment year 2005-2006 and subsequent years.

The amendment is no doubt welcome. It covers payment within India to be made to residents, unlike the existing provisions which applied only to payments outside India.

But then, making the law applicable from April 1, 2005, and accordingly for the entire assessment year 2005-06 seems inequitable. As the Budget itself was presented only in July 2004, how can anybody expect that payments from April 1, 2004, till the date of passing of the Finance Bill be covered under the new law? In many ways, the amended section is similar to Section 43B.

A number of chartered accountants have pointed out that there is an anomaly in the way the amendment is drafted. According to the amended law, if the default in making TDS is made good in any subsequent year, the underlying expense that was disallowed earlier will be allowed in the year in which the default is made good. Will the deduction be allowed if the default is made good in the same year in which it occurred? Is it intended that allowance would be lost for ever if TDS is made after payment in the same year? What applies to the rectification in the subsequent year should apply to the year of default also.

The Finance Bill also proposes to do away with the requirement of obtaining a separate tax collection account number. It is now provided that persons required to collect tax at source should obtain a tax deduction account number (TAN) under Section 203(A). The following legislative amendments have been made to facilitate the process of computerisation:

Credit for tax deducted or collected shall be given to the assessee without production of a certificate;

Returns will not be deemed to be defective if they are not accompanied by such certificates;

Every person deducting or collecting tax shall be required to furnish quarterly statements to the prescribed income-tax authority who will in turn finish an annual statement of the tax deducted or collected to the assessee;

All assesses, including non-residents, will be required to intimate the PAN to the person deducting or collecting tax as otherwise credit for TDS/TCS cannot be given; and

Penalty shall be levied in case quarterly statements are not furnished in time.

These amendments will take effect from April 1, 2005. Filing of TDS returns through computer is made compulsory where the persons collecting tax are companies or the Government.

These are salutary amendments and make life easier for taxpayers.

(The author is a former chief commissioner of income-tax.)

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