TDS & TCS

The Government can exercise its power to levy and collect tax only in accordance with Article 265 of the Constitution of India, which provides that ‘no tax shall be levied or collected except by authority of law’. Therefore, there should be specific provision in the taxing statute for charge of tax and for collection of tax.

There are three stages in imposition of a tax. In the first stage there is the declaration of liability that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment that ex hypothesi has already been fixed. But the assessment determines the exact sum which a person liable has to pay. Lastly, comes the method for recovery. Thus, the first part of a taxing statute contains the charging provisions, the second part contains the provisions for computation of tax and the third part contains provisions for payment, recovery and collection of tax.

Under the Income-tax Act, 1961, Chapter II consisting of sections 4 to 9 provide for the basis of charge and section 4 therein is the main charging provision. Chapter XVII of the Act deals with ‘Collection and Recovery of tax’. This Chapter provides for the following four methods of collection and recovery:

1. Deduction of tax at source. (TDS)

2. Collection of tax at source. (TCS)

3. Advance payment of tax.

4. Collection and recovery after demand.

The first two methods, which are indirect methods of collection are the most important ones and major portion of the revenue is recovered by these methods. The tax deducted or collected at source and paid to the Government is credited to the account of the assessee and as such amounts to payment of tax by or on behalf of the assessee. If the tax deducted or collected is short of the liability then the balance is payable or recoverable in the other two modes. If the tax deducted or collected is in excess of the liability then the assessee would be entitled to the refund of the excess amount.

The provisions for TDS and TCS are only the alternatives amongst the four methods of ‘Collection and Recovery of tax’. The liability of an assessee to tax does not depend on or get altered on account of the provisions for TDS or TCS. The basic liability of an assessee to pay tax directly always exists and continues irrespective of the provisions for TDS and TCS. Section 191 of the Act specifically provides that if the tax has not been deducted in accordance with the provisions, the assessee would be liable to pay the balance tax directly.

Primarily the liability to pay tax is on the assessee and the obligation to collect is on the Government. A third party has no role to play. However, the provisions for TDS and TCS have cast the obligation on the third party to deduct or collect tax on behalf of the Government and also has provided for a liability in case of non-compliance of the obligation. The Government expects free services from such third parties and pays no remuneration for such services. The provisions for TDS and TCS are mandatory and non-compliance would result in serious and harsh consequence of treating such third party as an assessee in default, interest, penalty and prosecution. One basic point which has always been ignored as regards the consequences is that the liability to pay tax is primarily on the assessee and this liability is never transferred. The Government cannot collect more than what is chargeable under the statute either directly or indirectly. The liability under the provisions of TDS and TCS is only the secondary liability and cannot exist independent of the primarily liability of the assessee. Therefore, if the assessee himself is not liable to tax or if the assessee has already paid the tax amount then the secondary liability under the provisions of TDS and TCS cannot operate. In such a case, there should be no adverse consequences on account of non deduction or non collection of tax at source. However, there have been contrary views on this issue. In some cases, the courts have taken the view that where the assessee has made the payment of the tax liability, there would be no case of non-compliance and no adverse consequences would follow by non deduction of tax at source. In some other cases, the courts have taken the view that the provisions for TDS are mandatory provisions which cast an independent obligation on the payer and the non-compliance would result in penal consequences irrespective of the fact that there is no outstanding tax liability in the case of the assessee. Explanation to section 191 inserted by the Finance Act, 2003 w.e.f. 01/06/2003 would throw some light on this issue. The said Explanation reads as under:

"Explanation.-For the removal of doubts, it is hereby declared that if any person referred to in section 200 and in the case referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct the whole or any part of the tax and such tax has not been paid by the assessee directly, then, such person, the principal officer and the company shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default as referred to in sub-section (1) of section 201 in respect of such tax."

In view of this Explanation, if the tax has been paid by the assessee directly then the non deduction of tax would not result in treating the payer of the amount as an assessee in default. This Explanation, accordingly, would support the first view, which is fair and reasonable. However, the Explanation has been made effective from 01/06/2003. Therefore, the question would arise in respect of the past cases. However, in view of the fact that the Explanation is clarificatory the benefit of the Explanation should be available for the past cases also.

Sections 192 to 203AA of the Income-tax Act, 1961 deal with the provisions for ‘Deduction of tax at source’ and section 206C and 206CA deal with the provisions for ‘Collection of tax at source’. The provisions for ‘Collection of tax at source’ are new provisions and were first time introduced by the Finance Act, 1988 w.e.f. 01/06/1988.

SPECIAL STORY – TDS AND TCS UNDER INCOME TAX LAW:

Keeping in mind the importance of the subject, the Journal Committee has selected this Special Story on ‘TDS and TCS under Income tax Law’ for this month. The authors have exhaustively dealt with all the aspects analysing the intricacies of the provisions. I thank Shri Pradeep Shah for his efforts in designing the Special Story. I also thank Shri Atul Suraiya and Shri Naresh Dharia for co-ordinating the Special Story. I am also thankful to all the authors for giving their articles in time.