Tax deduction at source (TDS) or withholding tax is a prime tax collection mechanism for the government and also a source for information collation to plug revenue leakages. The Indian tax regulations codified under the Income Tax Act, 1961 (“the Act”) contains comprehensive provisions dealing with TDS around applicability, rates of tax, compliances and consequences for non-compliances.
The provisions cast an onerous obligation on the taxpayers for tax withholding while making specified payments. Over the years, the government has made several amendments to widen the scope of withholding tax, for instance TDS on purchase of goods, e-commerce transactions, cash withdrawal etc. and also provisions to ensure better compliances by introducing higher TDS rates for non-compliant recipients or where the PAN card is not provided
TDS – Applicability and Consequences
Depending on the nature of a transaction, tax is required to be deducted by the payer at the time of payment or credit to the account of the recipient whichever happens earlier and subject to thresholds prescribed for such payments.
The rates at which tax is required to be deducted varies generally from 0.1 percent to 10 percent (except for payroll payments). However, a higher TDS rate of 20% is applicable where the recipient is unable to furnish its permanent account number (PAN). Similarly, in case of payments to non-residents, the applicable withholding tax rates depend upon the applicable domestic tax provision and relevant treaty provisions, whichever is more beneficial to the recipient.
In order to claim benefit of treaty provisions, a non-resident needs to furnish a tax residency certificate obtained from the tax authorities of its resident country along with a self-declaration of not carrying on any business in India through a permanent establishment.
Any non-withholding or short withholding of taxes would attract an interest, which is generally in the range of 1% to 1.5% per month. It may also lead to disallowance of expenses for the payer. The law also provides for penalty and prosecution implications for certain categories of defaults like where tax is withheld and not deposited with the government exchequer.
Key Steps in TDS Compliance
The TDS compliance framework provides for the following key steps:
- Deductor needs to obtain one-time tax deduction account number (TAN) by the Deductor.
- Collate various payee details such as PAN, address, nature of transaction, date of payment/credit.
- Determine whether tax is to be withheld on a particular transaction. If yes, then at what rate is the tax to be withheld.
- Deduct appropriate tax at the time of recording the transactions or payment whichever is earlier.
- Deposit taxes are deducted with the government exchequer by seventh of the subsequent month except for the month of March, where tax withheld can be deposited by April 30.
- File quarterly TDS return in applicable forms within the due dates which falls due at the month end immediately succeeding the quarter.
- Issue withholding tax certificates in Form 16/16A to deductee.
In order to facilitate the tax deductors to file TDS returns, various forms have been prescribed such as Form 24Q for payroll TDS returns, Form 26Q form other than payroll transactions, Form 27Q for non-resident payments (other than salary) and so on. Similarly, there are other forms prescribed for individual tax deductors in the form of challan, where providing information about the deductor and deductee including the amount payable and TDS thereon suffices the obligation to file TDS return.
All the above compliances are managed electronically through appropriate interface with Government sites.
Filing Quarterly TDS Returns
The TDS compliances are centrally managed through a separate platform of the tax authorities, namely TDS reconciliation analysis and correction enabling system (TRACES). TRACES platform contains various tools/guidance which a tax deductor can refer to better understand and meet its obligation.
While TRACES has developed automated applications to monitor TDS accuracy and compliances, it has also prescribed a simple process for TDS return filing. One can easily download the utility from TRACES website and file TDS return by providing various inputs required therein.
Following is a summary of the process for filing a non-salary TDS in Form 26Q:
|Fill General details about the deductor||Details of the deductor such as financial year to which the return relates, quarter for which the return is being filed, name of the deductor, TAN, PAN, address of the deductor, name of person responsible for deduction of tax, designation, email ID and mobile number.|
|Fill challan details||Details appearing in the challan generated upon deposit of monthly TDS liability is to be provided. These details generally include the amount of TDS deposited, date of deposit, BSR code, challan serial number, interest/penalty, if any, included in the challan.|
|Fill deductee details||Information regarding each deductee such as PAN, name, status, amount paid, TDS deducted, date of deduction, date of payment/credit, section under which TDS is deducted, rate at which tax is deducted, are required to be filled appropriately.|
|Validating the return by importing Challan Status Inquiry (CSI) file||CSI file is an ingredient that needs to be downloaded from the Tax Information Network (TIN) website and included in the files to complete the TDS return. The process to download the CSI file is simple and can be generated by entering TAN, period in which the challan has been deposited and the captcha code in TAN based view for taxpayers.|
|Generation of FVU file||After filling all the details, the return prepared is validated through the latest file validation utility (FVU). The Return Preparation Utility (RPU) checks the format level accuracy of the return prepared and validates the challan details entered from the CSI file downloaded using the latest FVU. Post validating the return successfully, a file is generated having .fvu extension which is to be submitted with the tax authorities. The TDS return in the .fvu file can be submitted physically to TIN Facilitation Centers (TIN-FC) who are authorized to accept it on behalf of the tax authorities. Alternatively, it can also be filed online through the income tax portal using TAN credentials.|
|Generation of form 27A||Along with the FVU file, the application also generates Form 27A in pdf format which shows a summary of the number of line items (PAN wise) available in the TDS return, total amount on which TDS is deducted, and total amount of challan against the amount. This Form 27A is to be signed either digitally or by hand and submitted to a TIN-FC along with the soft copy of the FVU file for uploading/filing.|
|Filing of FVU file||Once the FVU file and signed Form 27A is provided to the TIN-FC, they upload the TDS return to the tax authorities. Upon successful uploading, an acknowledgement is generated with a unique acknowledgement number for future reference.|
Upon successful filing of the TDS return, a deductor can see the status of the same on the TRACES Portal using its login credentials. The portal shows details of whether the return has been filed successfully or are there any errors to be rectified by filing a correction statement etc.
Key Considerations While Fling a TDS Return
While the process of filing TDS returns has been simplified by the Government through use of technology, there are certain points that require consideration while filing these returns. Due to the growing use of technology, a data input provided through TDS returns has an ability to impact multiple tax records that the tax department uses while processing tax returns of a taxpayer like assessing the income of a taxpayers, foreign remittances in case of non-resident payment etc.
Listed below are few data points, a correct disclosure of which in TDS returns may go a long way to reduce compliance cost and unnecessary tax disputes and demands on deductors and deductee:
- Quoting appropriate PAN in the TDS return is a prerequisite. Any error in PAN may lead to denial of tax credit to the actual deductee and at the same time also create a demand on the deductor applying higher rate i.e. 20% on account of incorrect PAN;
- Putting the right date of deduction and date of payment in the RPU. One has to be mindful of the dates to be filled in DD/MM/YYYY format, any mistake in the date may lead to a situation of short deduction or late deposit of TDS and consequently a tax demand being may be raised on the deductor;
- Filing of TDS return on or before the due date to avoid denial or delay of tax credit to the deductee and payment of late fees by the deductor;
- Appropriate disclosure of amount on which tax is deducted at source and tax actually deposited to avoid any mismatch in the records of deductee;
The tax deduction at source is a mechanism for the tax authorities to collect tax at the point of the transaction itself and obtain information to prevent any tax leakages.
At the same time, the process of filing TDS returns has been streamlined over the years through various functionalities developed by TRACES. Once appropriately followed, tax deductors would remain compliant with this important piece of compliance.
The article was originally published on Forbes.